AMZN Bull Vertical Put Spread

As much as I love writing about the winners, you can’t have those all the time. So goes the case with a recent bull vertical put spread on Amazon (AMZN).

Three days prior to option expiration, I decided to pull the trigger and give another credit spread a try. My first one on Citigroup is about a week from expiring and is currently at a 97% probability of a profit of $25. I could close that one out for $6 (plus $3 in commissions), but I’ll just let it expire.

This new one on Amazon had a good POP of 67% and a net credit of $53 for risking $250 (max loss of $197). Amazon had been struggling immediately after the price increase on their Amazon Prime service, but I hoped that was priced in. Also, Oppenheimer recently raised its price target. I was hoping that AMZN would rise slightly or stay the same. Even a small decrease would have been okay.

Mr. Market did not cooperate and, together with a general sell off within the technology sectors, Amazon fell from around 376 to end today just above 360, a drop of about 4.3% in just a few days.

The option expires officially tomorrow but with the market being closed, there’s not much positive that can happen. The “max pain” I hoped was pegged at 370. It very well might have been initially, but with the general sell-off, the stock appeared to be pegged at 360. This “max pain” theory suggests that “towards expiration date the price of a stock will move towards its strike price thus inflicting most losses (pain) to the majority of option traders as all parties with high investments try to steer the stock price towards their calls or puts to minimize their losses.” (Source and Max Pain Calculator: optioncalc). Another description/calculator is here:

This “max pain” theory sounds interesting and will be fun to watch in future trades.

For more information regarding bull vertical put spreads, please see my post here: Citigroup Bull Vertical Put Spread

Maximum loss is equal to the difference between the strike prices less the credit.
Maximum profit is limited to the net premium received.

March 19, 2014 AMZN Bull Vertical Put Spread
Sell to Open 1 AMZN Mar 22 2014 370.0 Put
Buy to Open 1 AMZN Mar 22 2014 367.5 Put
Credit: $0.53

Max loss: $197 (370-367.5-0.53)
Max profit: $53
Probability of profit (POP) (at time of trade): 67%
Break-even price: 369.47

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge

This site uses Akismet to reduce spam. Learn how your comment data is processed.