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Front-Month Speculators Gamble on Amazon.com

AMZN's December 260 strike attracts traders from both sides of the tape

by 12/19/2012 9:39 AM
Stocks quoted in this article:

Shares of Amazon.com, Inc. (NASDAQ:AMZN - 260.28) trekked about 2.6% higher yesterday, thanks to some upbeat analyst attention from RBC. As a result, approximately 51,000 calls crossed the tape by the time the closing bell rang, which was about double the equity's average daily call volume.

Leading the pack was the December 260 strike, where more than 10,900 calls changed hands at a volume-weighted average price (VWAP) of $2.72. A large chunk of the volume traded at the ask price, while open interest rose overnight -- pointing to buy-to-open activity. In order for traders to secure a profit on these freshly established bullish bets, the stock must climb north of $262.72 (strike price plus the average premium paid) by front-month expiration this Friday.

However, it's worth noting that the December 260 strike saw a fair amount of put action, as well. Nearly 8,500 of these contracts were exchanged on Tuesday -- a healthy portion of them at the ask price, suggesting they were bought. This put strike also saw an overnight rise in open interest, denoting the initiation of new positions. Since the VWAP for the contracts arrived at $2.77, these speculators are betting on AMZN to retreat below $257.23 prior to Friday's close.

From a wider sentiment scope, AMZN puts have been favored over calls lately. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio sits at 1.24, indicating puts bought to open have outpaced calls during the past two weeks. This ratio is just 10 percentage points shy of a yearly acme, meaning traders have been snapping up puts over calls at an almost annual-high clip.

Similarly, Schaeffer's put/call open interest ratio (SOIR) for AMZN checks in at 1.41, with puts outnumbering calls among the front three-months' series of options. This ratio ranks higher than 88% of comparable readings gathered during the past year, reflecting a stronger-than-typical preference for puts over calls.

The bearish sentiment toward AMZN in the options pits is a stark contrast to the upbeat attitude among the brokerage bunch. The online marketplace boasts 19 "strong buys" and one "buy" endorsement, versus 10 "holds," and zero "sell" suggestions. This vote of confidence is hardly surprising, given AMZN's year-to-date gain of more than 50%. The stock has also bested the broader S&P 500 Index (SPX) by nearly seven percentage points during the past month. Looking even closer at the charts, AMZN managed to close yesterday's session atop the $260 level for the first time since Oct. 4 -- giving Tuesday's December 260 call buyers a slight advantage over the put buyers.


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