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Why I "Shorted" AMZN

|Includes: Amazon.com, Inc. (AMZN)

Alright, I admit, I didn't actually short AMZN.  But I did buy November 150 puts, assuming the market is going to wake up and realize that AMZN is trading at an unsustainable multiple.  As of yesterday's  (9/27/10) close, AMZN is trading at 45x its 2011 estimated earnings. 

This wouldn't bother me if I were long and I thought AMZN was going to crank out 45% or greater increases in earnings for the next few years.  But I don't, and I think the Street is estimating 25% growth going forward.  So I bought the puts.

Two things concern me.  First, The Market is Never Wrong.  I might think AMZN is overvalued here, and I can buy puts firmly convinced that the stock is going to take a hit.  But until that happens, I'm out the premium I paid.  If the Street decides that AMZN deserves a premium to its growth rate, I can post all I want and buy puts until I'm broke, but the stock will stay up at these levels.

Second, window dressing.  Here at the end of the third quarter, I could see money managers deciding they want AMZN in their portfolio so they can report they had AMZN in their portfolio during the quarter.   However, window dressing comes to an end, and I think the first few trading days of October will show me whether AMZN can continue the upside performance.  This is why I bought the November contracts, as opposed to the October.

There's always a wild card: JPM spiked the stock last week with increased earnings and target price, and somebody could report that AMZN is going to come out with a Kindle that does your laundry and therefore deserves on ongoing premium.  But that knife cuts in both directions.  If an analyst comes out tomorrow and makes a "valuation" call, AMZN could take a knock on the head (any Jack Aubrey fans out there?)  So I stick with the fundamentals, and might buy another tranche of puts if this thing doesn't cool off.

Disclosure: Long November puts in AMZN