What to Do Next as Amazon Breaks $1,000
Amazon.com, Inc. (NASDAQ:AMZN) beat Apple Inc. (NASDAQ:AAPL) to the $1,000 plateau but, if not for a 7-to-1 stock split initiated by Apple in May 2014, Apple would have a current stock price of about $1,092.
Whatever the comparisons, Amazon is powering along the stock chart, easily outperforming the S&P 500 over the last year.
There is even the constant chatter of Amazon undertaking a stock split to reduce its stock price and making it more accessible to the broader investor market.
A stock split would make sense, as the result could be an added boost to the stock at lower share prices. It worked for Apple and also would for Amazon stock, which may be a reason why some traders are currently buying AMZN stock, hoping for a split.
Of course, The Priceline Group Inc (NASDAQ:PCLN) has yet to perform a stock split, and its share price continues to ride to the stratosphere, at $1,900 a share.
Regardless of whether Amazon decides to split its stock, the reality is that founder and CEO Jeff Bezos is providing the leadership to aggressively build the company in areas that have mass consumer appeal.
Amazon is tops in the online consumer space, selling you almost anything you might need. Its supply chain network and technology infrastructure to buy goods is stellar.
The company just opened up an Amazon bookstore in New York City to gauge the market interest. The technology in the store is innovative, allowing you to directly buy any book or product via your smartphone without having to line up at the cashier.
By all accounts, Amazon will likely not make money from this venture, but what it does achieve is test the market and continue to fine-tune its business strategy. I doubt you will see hundreds of Amazon bookstores scattered throughout the country.
The same principles are carried out with its grocery business, which has been under development for years without a sense of direction.
The “AmazonFresh” grocery business is small, with about 31 stores in the U.S. and several in Europe. Amazon was thinking of buying Whole Foods Market, Inc. (NASDAQ:WFM) last December, but ultimately decided against it.
Clearly, Amazon is taking a steady and cautious approach to its grocery business, building up the stores the way it wants, rather than spending the $15.0 billion or so it would likely have to pay for troubled Whole Foods.
An Options Strategy for AMZN Stock
For traders and investors alike, it’s not an easy decision to decide whether to pay $1,000 for AMZN stock that trades at 90 times 2018 earnings, but there are alternative routes.
Longer-term, Amazon stock is a great addition. It’s just a matter of how much you are willing to pay for AMZN stock.
Chart courtesy of StockCharts.com
A good alternative would be to sell put options on AMZN stock to establish a lower entry price.
Say you are willing to buy Amazon stock at $950.00 to $960.00. I will use the July 21 expiry as an example. You can sell the Amazon $950.00 put expiring on July 21 at the current premium of $11.00 per share or $1,100 per contract, which is yours to keep, regardless of whether the trade pans out.
If AMZN stock doesn’t fall to $950.00 by the expiry date, you keep the $11.00 per share and can then sell another put with an expiry down the road.
Alternatively, if AMZN stock falls to $950.00, you would be obligated to buy the stock at $950.00. The premium of $11.00 lowers your adjusted cost base to $939.00.
Now say you would rather buy the stock at the current $996.00.
You can reduce the adjusted cost base by selling covered call options against your underlying Amazon stock position. Make sure you sell calls on exactly the same number of shares you own, otherwise the calls are naked, exposing you to unlimited risk.
Going back to the July contracts, say you believe that Amazon stock will not reach $1,050 by the July 21 expiry.
You can write a covered call at $1,050 for premiums of $10.00. If AMZN stock fails to trade at $1,050 by the expiry date, you retain the premium and drop your adjusted cost base to $986.00. You can do it to sell covered calls against your position.