Simple Option Play on Amazon’s Big Rally

11/09/2011 9:00 am EST

Focus: OPTIONS

Shares of popular online retailer Amazon.com (AMZN) are recovering nicely from an earnings-inspired decline, and a bull call spread is the best way to play it, writes Tyler Craig, contributor to InvestorPlace.com.

Following last month’s post-earnings beatdown, Amazon.com (AMZN) has powered its way higher as buyers have stepped in to scoop up shares at what is looking like a bargain price.

In the short term, AMZN has been basing sideways at the key resistance level of $219. Once AMZN musters the strength to break above this level, it should continue its run higher to fill its earnings gap.

chart
Click to Enlarge

The higher price tag on AMZN shares spills over into the options arena. The expensive price of most option contracts available could serve as a deterrent to many would-be option buyers. However, don’t let the price stop you from investing in what could be a potentially profitable trade.

Fortunately, option spreads offer you a much cheaper way to place a bet while still being exposed to an expected move in the underlying stock. While there are numerous spreads to choose from, the simple bull call spread may be appropriate in this situation.

Looking for bullish exposure in this online retailer? Consider the purchase of an AMZN December 220-230 call spread, which you can currently enter for $4.

Buying this spread consists of “buying to open” the Dec 220 call (which would cost approximately $9.50, at the time of this writing). At the same time, you’d also be “selling to open” the Dec 230 call (which would give you a credit of about $5.50 at current levels).

The max risk is limited to the initial debit paid ($950 – $550 = $400), and the max reward is limited to the distance between the strikes ($230 – $220 = $10) minus the $4 debit, so $600 total.

By Tyler Craig, contributor, InvestorPlace.com

Related Articles on OPTIONS