Our Strategic Mindset at Top Gun Options changed 4 weeks ago from Market Neutral with a Bearish Bias to Bearish. With lingering debt issues in Europe and a near certain exit of Greece from the Eurozone, we feel that short term the market is facing significant headwinds. Numerous economic reports this week domestically, along with China PMI numbers, should give us a clearer picture into how the summer will shape up. We also believe the 'Facebook (FB) Flop' will help stabilize other internet flagships as institutional money heads back to established companies who actually make money.
Target: Amazon (AMZN) trading at 212.89
Commit Criteria: After reporting blowout earnings on 26 April, Amazon has run out of steam. We've successfully traded Amazon over the past 3 months, including April earnings, and we've added over $4,000 in profits to the Model Portfolio. We're returning to Amazon now because it looks like Amazon is potentially filling the earnings gap (see 3-month chart below) and there's a 13% difference between historical and implied volatility, which is adding some nice premium to the options:
Charts source: trademonster.com/tgo.
Tactic: Sell 15 Jun 185/190/225/230 Iron Condor for a credit of $1.30.
Tactical Employment: An Iron Condor is simply 2 options vertical tactics combined - a Bull Put Spread (credit spread) and a Bear Call Spread (credit spread).
- Buy to Open 15 Jun 185 Puts for $.925
- Sell to Open 15 Jun 190 Puts for $1.32
- Sell to Open 15 Jun 225 Calls for $2.09
- Buy to open 15 Jun 230 Calls for $1.18
- Net credit of $1.30
- Max Gain: $1,950, 69% probability of retaining max profit (the credit we receive)
- Max Loss: $5,550, 19.47% probability of sustaining max loss. According to Top Gun Options trading ROE (Rules of Engagement), we will not risk more than 5% of the model portfolio on any one trade.
Midcourse Guidance: We will let this trade fly down range unless we see a significant shift in market sentiment. We saw a brief a relief rally last week that was short lived and believe the market is somewhat oversold and will trade sideways with the seasonal summer selloff and the continued problems overseas.
Eject Criteria: We will close this position if we lose more than 50% of our credit on one of the vertical spreads. As always, we close the position whenever the Commit Criteria change.
AMZN rallied on earnings and is now facing the same market headwinds as everyone else; with no short term stimulus to boost the stock we feel that AMZN could potentially fill the earnings gap and continue to channel in the dog days of summer.
Disclosure: I am short AMZN. We hold this position in our Primary Model Portfolio.