Daily Archives: December 11, 2017

Technology

Here’s How to Short Amazon

Amazon.com Inc. (Nasdaq: AMZN), the online retail giant, has seen its stock price skyrocket more than 50% over the last 12 months.

It has surged past the $1,000 price level, which was tricky to break through, and has continued to climb since then.

Many investors are looking at the euphoric Amazon stock price movement and wondering if now is a good time to short the stock.

The answer is no.

There’s never a good time to short a cult-like stock such as Amazon. It doesn’t trade on normal parameters, and it operates a business model that doesn’t have to generate a profitfor its stock to go up. These types of companies are almost impossible to short because of that.

But there is another way to profit, one I have shared with you in the past: not buying into the hype of the Amazon stock price.

Here’s what I mean…

 Grocery Stocks Got Slammed

Back in June, Amazon announced it would acquire Whole Foods to disrupt the grocery sector. Many investors bought the hype and immediately downgraded all sorts of grocery-related stocks expecting Amazon’s competition to weigh on the industry.

Then, in late August, Amazon completed the acquisition ahead of schedule.

Once again, grocery stocks got slammed.

I wrote an article on September 4 saying this bloodbath was your buying opportunity, and it paid off with an average gain of 15% since then on the five stocks I listed.

And out of the five stocks mentioned, The Kroger Co. (NYSE: KR), Sprouts Farmers Market Inc. (Nasdaq: SFM), Wal-Mart Stores Inc. (NYSE: WMT), Costco Wholesale Corp. (Nasdaq: COST) and SuperValu Inc. (NYSE: SVU), all but one has rallied basically 20% since then.

The one stock that is down is SuperValu, and even that stock popped 10% early on. Take a look:

The Amazon stock price has skyrocketed over 50% the last 12 months. But don't short the stock. Use this trading strategy instead.

Not a bad return considering Amazon was expected to crush the competition in the sector.

For reference, the S&P 500 is up about half of that amount over the same time period.

If you have seen gains like this in these stocks, and your sole purpose of owning them was to benefit from the rebound, then you can take profits off the table now.

Opportunities that come from buying into industries that Amazon attempts to disrupt occur often.

Just this year it has happened with delivery companies, pharmacy companies, grocery stocks and, last week, a new industry — dental stocks.

Overreactions to the Amazon Stock Price

Last Wednesday, dental supply stocks Henry Schein Inc. (Nasdaq: HSIC) and Patterson Cos. Inc. (Nasdaq: PDCO) closed down more than 4%.

The reason? Amazon.

Amazon is reported to now be buying dental products from a different direct manufacturer, Dentsply Sirona Inc. (Nasdaq: XRAY) — its shares were unchanged on the news.

A Henry Schein spokesperson said the company is “unaware of any market-leading dental manufacturer” having a direct relationship with Amazon, adding: “We believe that at this time Amazon is a minor player in the dental consumables market, with an insignificant market penetration.”

This doesn’t sound like a major threat to the way things are done, and it’s why buying these dental stocks on this weakness is an opportunity.

I wrote back in October about Amazon’s many failed attempts to disrupt industries. It’s what makes Amazon Amazon. But it’s also why these overreactions are buying opportunities.

Regards,

Chad Shoop, CMT

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Options, Technology

A Big Volatility Trade To End The Year

2017 isn’t exactly going out with a bang – but it’s also not ending with a whimper either.  We’re actually seeing higher levels of volatility than what we’ve experienced most of the year.  Granted, volatility (as measured by the VIX) has been historically low in recent months.  However, the end of the year so far is proving to be a bit more interesting.

First off, we’re seeing a fairly substantial rotation out of tech stocks and into financials and other sectors.  Tech stocks have been driving the market this year and valuations have definitely gotten a bit frothy.  Moreover, financials should see benefits from higher interest rates coming in 2018 and beyond.

Tech has been hit pretty hard – especially the chip stocks – and this may have caught some investors off guard.  Surprising investors is certainly one way to get volatility to go higher.  The Semiconductor Index chart below makes this pretty clear.

Of course, there are several other factors contributing to relatively higher VIX levels, most of them political in nature.  The tax reform bill has been front and center in terms of financial news.  Who knows what the final version of the bill will end up looking like, but it seems pretty certain it will be a boon for corporations.  Any serious issues with the bill (eventually) passing could certainly add to market volatility.

There’s also the threat of government shutdown, although by the time you read this, I predict a short-term deal will already be in place.

Finally, there’s the Mueller investigation regarding the current administration and Russian interference with the election.  This case seems to have some legs to it, although the impact on the stock market remains nebulous at best.  Even if high ranking members of the administration are forced to resign, it really shouldn’t change much in terms of economics.  Once again, I expect a business-favorable tax plan to pass regardless.

SEE ALSO: This “21st Century Pension Plan” Pays You Income for LIFE

Keep in mind, political news tends to create short-term volatility.  Long-term changes in volatility are mostly the result of economics.  A political scandal is generally a short-term situation.  A tax bill is long-term.

That being said, plenty of big VIX trades are hitting the wire – and the majority of them are focused on the VIX moving higher.  Of course the VIX is the main instrument used for hedging, so it stands to reason that most big trades in VIX options would be on the long side.  Nevertheless, you can tell a lot of what hedgers are thinking about risk levels by what strikes they use.

For instance, a sizeable trader recently purchased 50,000 January VIX 20 calls for $0.50. That’s a $2.5 million bet that the VIX breaks above $20.50 by mid-January.  Of course for that kind of money, this is clearly a hedge.  The VIX hasn’t been above 20 in over a year – and hasn’t even been particularly close this year.

As someone who is generally a seller of volatility, I don’t like spending a lot of money going long VIX whether it’s a hedge or a speculative bet.  As such, I’d prefer to do a long call spread rather than buying calls straight up.  As an example, if you think the VIX is going to move higher or want to hedge, you could buy the January 13-18 call spread (buying the 13, selling the 18) for about $0.80.

It’s a good way to keep your costs low while also providing decent upside potential.  A max loss of $0.80 with a max gain of $4.20 (if VIX is at $18 or above by January expiration) is certainly a good ratio to have on a call spread.

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Source: Investors Alley