For Amazon (AMZN), A Market Shift Doesn't Stop Profitable Option Trading
For Amazon (AMZN), A Market Shift Doesn't Stop Profitable Option Trading
Date Published: 2018-08-15
Disclaimer
The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.LEDE
Working off of our last dossier, The Clever, Effective, Winning Pattern in the S&P 500 Using Options, today we examine a similar approach with Amazon.com (NASDAQ:AMZN).By adding some timing around the back-test, we find a strategy which has shown a profitable back-test for six-years in a row -- that's 23 trades without a loss going back to 2012.
Custom Timing
First we'll start with timing. Here it is:
The trade opens 25 days after earnings and closes 30 days later. AMZN last had earnings on 7-26-2018. 25 days after that, would be Monday 8-20-2018, near the close of trading.
Building the Strategy Before We See the Results
We constructed a multi-leg strategy, just as we did for the S&P 500 ETF (SPY) back-test, but that is not code for complicated -- it has just a few steps. Here is the entire image, and then we will break it down, leg by leg.
Now, let's review each leg.
Rules
The first leg of this trade is simply a long, out of the money (40 delta) put. That's it.* Buy a 40 delta monthly put.
The second leg of this trade sells two further out of the money (30 delta) puts.
* Sell two 30 delta monthly puts.
The third leg of this trade sells an even further out of the money (22 delta) put.
* Sell a 22 delta monthly put.
The fourth and final leg of this trade purchases two even yet further out of the money (15 delta) puts, leaving the entire strategy long 3 options and short 3 options -- the risk is well defined.
* Buy two 15 delta monthly puts.
What Does This Mean?
This is casually called a ratio spread, and specifically this is a 1 x 2 x 1 x 2 (read out loud as "1 by 2 by 1 by 2") put spread.The idea is to create an option position that:
* Creates a credit
* Has no upside risk
* Has some downside bias (if the stock goes down "a little" it profits at the maximum level)
* Covers the short positions with a final out of the money put purchase to limit total downside.
Here is set of trades in 2018, the top four lines are the opening trades, the bottom four lines are the resulting closing profit and losses.
And here is how all of that looks in a profit and loss chart at expiration:
This strategy is profitable in the green shaded area, and shows a loss in the red shaded area.
To get your bearings:
* The maximum loss starts at the lowest strike price, in this case, $1400. Any stock price there or lower showed a capped loss at its maximum.
* The maximum gain occurred right at the second-strike price (the first short strike price), in this case $1465.
This strategy does well in a bull market but does best in a slightly bearish market. It does worst when there is a large stock drop, but that loss is capped.
Finally, The Results
Here are the results of this strategy over the last six-years, or 23 post-earnings periods.And finally, for completeness, over the last year:
How to Try This Yourself
We simply used the Trade Machine® Custom Strategy builder. You can create it yourself immediately as a Trade Machine member, by simply clicking on any of the back-test links above, then click the "edit" button, and save.You can become an expert at strategy building by watching our video which can be accessed in the link directly below the custom strategy button.
What Do We have
We now have a custom strategy, once used on the S&P 500, and now used on Amazon.In a few mouse clicks and about 30 seconds, we empirically identify a pattern that has repeatedly turned a profit over and over again, then displayed those results with no room for confusion or doubt. You can tap the link below to become your own option expert.
Tap Here, See for Yourself
Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.