That is some weird stuff folks. No more Mr. Ups guy…it’s going to be a drone now.
So with these drones now potentially delivering Amazon packages, maybe the stock will go higher? And if the stock is going to go higher, what can we do to make as much money as we possibly can. Remember, the goal is to pull every single penny out of the market each and every day.
Amazon is a big stock as it now sits over $800 a share. Because of this, are trading AMZN options a more viable solution than trading the stock?
What a massive business. And an even more massive stock.
Amazon has more than doubled its stock price over the last three years. Very impressive, as it now sits at $853.46 a share with a market cap of a whopping $407,246,037,345. Wow. The way we calculate this is we locate the amount of share outstanding (477,170,630) and multiply that by the stock price ($853.46) and we end up with a total market cap of over 400 billion.
Amazon is institutionally held judging by the fact that it traded 2,436,434 shares yesterday with a total notional value of $2,079,398,961.60. Very impressive. The way we calculate this is we location the amount of shares traded for the day (2,436,434) and multiply that number by the stock price ($853.46) and we end up with a total notional value traded for the stock of over two billion dollars.
Many people like Amazon, but if we think it’s going higher can we buy the stock?
I am here to tell you that that is going to be difficult. There are two reasons.
- $853.46 is a large price and some people cannot afford more than a few shares
- The bid/ask spread for the stock is too large
This makes trading the stock a lot less realistic than we originally thought. However, if there is this much liquidity in the stock, there must be a lot of liquidity in AMZN options, right?
Let’s give them a try. In order to see if AMZN options are the right play, we need to look at their liquidity and specifically volume, open interest, expiration cycles, and bid/ask spreads.
Over 100 thousands options contracts traded on a single day is a enormous number let alone an $800+ stock. With this many options contracts traded in a day, the total size of the AMZN options market Friday was $9,389,510,882. The way we find that is we take the stock price ($852.46), multiply it by 100 ($852.46) as every option is worth 100 share of stock, and then multiply that number by the amount of contracts traded (110,017) and we get a number north of nine billion.
These are big boy numbers everyone. Very few products trade larger notional values than Amazon does.
Does Amazon have monthly and weekly options expirations?
They sure do. This allows us to have as much fun as we want with AMZN options come earnings season.
What about the markets tho? The stock has a ton of volume but the markets were very wide. What about the AMZN options? Do they have big bid/ask spreads too?
They unfortunately do. While we would consider the options volume and open interest to be strong, the bid/ask spreads here are just too large as they are upwards of $1.
How We Recommend Trading AMZN Options
We can still trade these options but we just need to be smart about them.
For starters, we recommend not trading any uncovered options. This means no naked calls or naked puts. Why might you ask? Three reasons.
- The markets are too wide
- This is a big product
- The capital requirements are a lot
For example, if we wanted to sell the $860 call, in a normal margin account, it would require us to use $17,200 in margin requirements. The way we figure this is by taking the value of the option ($86,000) and divide it by five as there is a 20% margin requirement on naked options.
But there is hope! Because there is so much competition to trade Amazon, the spread markets are very good. We can trade any spread we would like in Amazon as the markets are not only tight and liquid, but trading covered options allows us to define our risk and thus reduce our margin requirements.
If we sold the $860 call, we would collect about $14.30 in premium and would be hoping Amazon would go down and it would cost us $17,200 in margin requirements. At the same time, if we sold the $860/$865 call spread
we would collect $2.00 in premium, also hope the stock would go down, and only have to us $300 in buying power since our max loss is $500.
Wrapping it All Up
We do not recommend trading Amazon stock, however, we do recommend trading AMZN options.
We do not recommend trading uncovered options in Amazon, but we do recommend trading any and all covered spreads.
The liquidity is there, we just need to be smart about it.