Amazon (AMZN) Reports Strong Earnings, Traders React Positively
Amazon (AMZN) reported its earnings last night and traders are loving the results. The stock market reacted positively to the news, resulting in a short squeeze for traders. This was further bolstered by strong job numbers that were released today. As a result, today’s column will focus on a long call butterfly spread trade in Amazon stock.
Market Background and Potential Market Risks
After Federal Reserve Chairman Jerome Powell’s remarks on Wednesday, the stock market experienced a short squeeze. However, traders should keep an eye on the upcoming five-year Treasury bond auctions in March. It is advisable to wait for weekly pullbacks, including in Amazon stock, before going long.
The Long Call Butterfly Spread Trade Setup
The long call butterfly spread trade is a neutral to bullish position. It anticipates that prices will rise over the long term but may also stall out at the round level of 180. Here’s how the trade is set up:
- Buy to open 1 AMZN May 17-expiring call option with a 170 strike price
- Sell to open 2 AMZN May 17 180 calls
- Buy to open 1 AMZN May 17 190 call
The total debit for this trade is $1.35 per share, resulting in a break-even cost at 171.35 in Amazon stock.
Exit Strategies
Traders have four choices to exit the trade. They can either sell the entire butterfly spread once it carries an acceptable profit, sell the entire spread in Amazon stock once it hits their loss threshold, sell the entire butterfly spread when prices test the middle strike price of 180, or sell the long call spread when the middle strike price is tested, allowing the short side to expire worthless.
Defending the Trade
Hunting for stocks using fundamental and price strength is crucial in the current economic backdrop. Technical analysis is used to find ideal buying opportunities in conjunction with tools for strength seen on IBD. The goal of the butterfly trade is to gain exposure to profit while significantly limiting losses if the trade is incorrect. Options sellers benefit if the stock does nothing or if it moves within the specified ranges.
Key Chart Levels and Scenarios
Key chart levels in Amazon stock include monthly support near 155 and resistance near 188. Traders should be on the lookout for sharp dips and potential opportunities to add to the position. However, increased risk should be carefully considered. Consider the following scenarios:
- Amazon stock dips but does not break 155 for more than three days, indicating favorable conditions for longer-term growth.
- Stock grinds higher early in the cycle, resulting in a significant increase in the value of the options position. Traders may choose to sell the entire position for quick gains.
- Amazon stock tests or breaches 180 but immediately retreats, suggesting that traders are not willing to pay more for the stock at the present time. This scenario is ideal if it occurs before the May expiration strike.
- Amazon stock breaks down in heavy volume for more than three days, breaching personal risk thresholds. In this case, traders should exit the trade.
Conclusion
Traders should carefully consider their risk and be patient when executing the long call butterfly spread trade in Amazon stock. It is important to monitor price action and adhere to stop losses. By following key chart levels and considering various scenarios, traders can make informed decisions in their trading strategy.
Analyst comment
Positive news: Amazon reported strong earnings and traders reacted positively, resulting in a short squeeze. Strong job numbers further boosted market sentiment.
As an analyst, it is expected that the market will continue to react positively to Amazon’s strong earnings and the overall positive sentiment. Traders may continue to capitalize on the short squeeze and invest in Amazon stock, potentially leading to further price increases. However, caution is advised, with potential pullbacks and market risks, such as upcoming Treasury bond auctions and the need for weekly pullbacks, before going long on Amazon stock. Traders should carefully consider their risk and monitor price action, adhering to stop losses.
