Amazon.com Inc (NASDAQ:AMZN) : Using Put Spreads to Outperform the StockDate Published: 2017-01-2
Selling puts is a common option strategy during a bull market, but it turns out that looking at a lower risk put spread, and being rather clever in how we treat earnings, yields powerful results in Amazon.com Inc (NASDAQ:AMZN) . More urgently, if we do not look at this approach, we would likely miss some worthy short put spread opportunities and incorrectly identify them as losers. This is one of those cases.
There is a lot less 'luck' involved in successful option trading than many people know, and it's not about guessing stock price direction. Let's review this phenomenon right now for AMZN. Let's first examine a one-year back-test of a short put spread strategy implementing these rules:
* Trade monthly options (roll the trade every 30-days).
* Avoid earnings
* Test short put spreads for one-year
Here's how to implement this quickly in the back-tester:
If we do this test, we find that the best short put spread to employ is the 50 delta, 10 delta put spread.
If we do a short put spread in Amazon.com Inc (NASDAQ:AMZN) over the last one-year but always avoid earnings we get these results:
The results above reveal two critical pieces of information. First, we see a strong performing short put spread with a 22.8% return. But, just as important, we also see that the 22.8% return in the short put spread considerably out-performs Amazon.com Inc stock over the last two-years, which hit 13.3%.
Altogether we're looking at a 9.5% out-performance while taking less risk than owning the stock outright and always avoiding earnings risk.
While out-performing the stock and avoiding the risk of earnings is a powerful implementation of a short put spread, there's even more going on here. We can repeat this back-test but this time examine only trading earnings. Specifically, we open our short put spread two-days before earnings, let the earnings event occur, and then close the position two-days after earnings.
Here's how easy the test is. We simply click the appropriate buttons.:
Now we examine the results for that same 50, 10 delta short put spread.
Now we see explicitly the impact of avoiding earnings. Holding the short put spread position in Amazon.com Inc (NASDAQ:AMZN) through earnings under-performed the stock and certainly under-performed a short put spread that avoided this risk. In fact, our strategy to avoid earnings beat the strategy held only during earnings by a whopping 9.9%. The reality is that it's remarkably easy to overlook this implementation without diving just a little deeper than the standard option analysis.
For an explicit demonstration we chart the stock returns, the short put strategy with earnings and the one that avoids earnings, below.
Amazon.com Inc Stock
and short Put Spread Returns %
We can explicitly see the out-performance in Amazon.com Inc by being methodical in our approach and in this case avoiding the risk of earnings.
When we take the time to go through this analysis, which really isn't very hard with the right tools, this approach with Amazon.com Inc (NASDAQ:AMZN) reveals that this ethereal concept of 'options expert' has been made far too complicated and even intangible. Below, we go the final step (with a video).