168% Gain on Amazon (AMZN) Calls Underscores the Case for Higher-Priced Options
A little over a month ago, we made the case for trading options on expensive stocks; Tesla (TSLA) served as the poster child. While that wasn't an official trade at the time, another pricy stock has since been the underlying instrument of a very successful trade, underscoring our point being made at the time. Subscribers to our new FANG (Facebook, Apple, Netflix, and Google) trading service were the beneficiaries of this suggestion.
Generally speaking, the more expensive a stock is, the more its options cost. Though all things are relative, for some traders, paying more than a couple of dollars for a put or a call is a tough mental hurdle to clear.
Sometimes though, after you crunch the numbers and factor in an option's delta -- how much it changes with respect to price changes in the underlying stock (or index) -- these 'expensive' options actually cost less than their lower-priced peers. See, a potential gain is a relative matter. A relatively small move from a high-priced stock can often drive more movement in its options than a big move from a low-priced stock can for its lower-priced options.
The recent trade on Amazon (AMZN) makes this point quite clearly.
Our new FANG service's strategy is ultimately based on a 30-minute chart. Though we can't divulge the details of how it works, we can tell you it's ultimately based on an ADX/DMI chart.
On Tuesday, March 28th, we bought to open the Amazon (AMZN) April Week 1 (04/07) 852.5 Call (AMZN 170407C852.5) at a price of $8.70, or $870 per contract. It's not a cheap option, but worth it. At the time, the delta was a healthy 0.61, meaning that for every $1.00 AMZN shares rose, the option would gain 61 cents. BUT, as the stock rises, that delta improves... meaning the call would become even more responsive the more Amazon shares gained.
Here's the thing - a $1.00 move is nothing for an $833 stock. That's only about 0.1% for the stock. AMZN shares easily move ten and even twenty times that much every day. Said another way, it was worth the price.
The chart below is a 15-minute chart of AMZN rather than a 30-minute view, simply because the shorter timeframe shows is something that doesn't show up as well on the 30-minute look. That is, the entry at around 11:30 am was prompted by the rekindled bullish thrust that materialized between 11:00 am and 11:30 that day. The effort early on in that session was impressive, but there was no guarantee of follow-through. After the initial pop faded and then the bulls regrouped a couple hours later, we knew the undertow was indeed bullish. The rally in the meantime speaks for itself. AMZN advanced $22 through Thursday's open, and the Amazon (AMZN) April Week 1 852.5 calls made a similar move. All told, their value soared from the $8.70 we paid to $23.40 -- or $2340 per contract -- we sold them at Thursday morning. That was a $14.70 move for the option, meaning the call gained about 69 cents for every dollar the stock gained. [It was actually a little better than that, but we didn't get out at the exact Thursday high.]
The exit was also prompted by the same ADX/DMI chart that got us into the trade. Again, we can't offer any proprietary details. Besides, our system is based on a 30-minute chart rather than the 15-minute chart you see above; our ADX/DMI settings are also different than the ones on the chart. Even so, it's not difficult to see that the flavor of the DMI/ADX lines changed dramatically late Wednesday and early Thursday, giving us an early warning to lock in the gain at the best possible level.
High-delta option trades on expensive stocks are still risky, to be sure - they can fall just as quickly a they rise. But, when paired with the high-odds system like the one we've developed for our new FANG trading service, the risk/reward ratio is compelling. It scored us a 168% gain on our Amazon calls, and it looks like we got out at the right time.
It's this strong responsiveness from Facebook, Amazon and Netflix options that has us so excited about our new FANG service. We're expecting very sizeable moves for those subscribers willing to look past the absolute price of the option and instead focus on the potential percentage returns. If you want less risk, the ideal strategy in the case of the FANG service is simply to buy smaller positions... maybe even just one contract.
If you'd like to learn more about the FANG service or go ahead and secure your membership, call 1-800 BIGTRENDS (1-800-244-8736) or email [email protected] to get in touch with a Client Care representative.