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Smart Investor - Getting paid to wait: using put options to buy amazon at a discount during earnings season
Koen Hoorelbeke
Investment and Options Strategist
Summary: During earnings season, selling cash-secured puts on Amazon can allow investors to capture premium income while setting up a potential discounted entry into the stock. This article explores how the strategy works, its advantages during volatile periods, and key considerations to help investors make informed choices.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.
Getting paid to wait: using put options to buy amazon at a discount during earnings season
Introduction
Earnings season often brings heightened volatility to major stocks, and Amazon is no exception. For investors looking to gain exposure to Amazon at a discount, this volatility creates an ideal opportunity. A cash-secured put is a strategy that allows investors to “get paid to wait” by collecting premium income while positioning for a discounted entry if assigned.
This article explores how selling a cash-secured put on Amazon, with an example using the November 29, 2024, expiry, can capitalize on the elevated volatility surrounding earnings events. The options prices, premiums, and strike prices mentioned throughout the article are based on the conditions at the time the data was captured, and are provided purely as educational examples. By the time of publishing, actual prices and premiums may differ.
Important note: Investors should conduct their own due diligence and make independent decisions on expiry dates, strike prices, and other parameters to align with their personal investment goals and risk tolerance.
The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
We’ll walk through the details of this strategy, how it compares to using a limit order, and the associated risks and benefits.
What is a cash-secured put?
For those unfamiliar with the strategy, a cash-secured put is a conservative options strategy often used by investors who are interested in buying a stock at a specific price but would prefer to “get paid to wait” rather than placing a simple limit order. Here’s how it works:
When selling a cash-secured put, an investor agrees to buy shares of a stock at a predetermined price (known as the strike price) if the option is exercised. In return for taking on this obligation, the investor receives a premium upfront, which serves as income regardless of whether they end up buying the stock.
The “cash-secured” part of the strategy means the investor sets aside enough cash in their account to cover the purchase if they are assigned the shares. For example, if selling a put with a strike price of $180 on Amazon, they would reserve $18,000 (100 shares x $180) to buy the shares if assigned.
There are two possible outcomes:
- The option expires without assignment: If Amazon’s stock price stays above the strike price, the option expires worthless, and the investor keeps the premium as pure profit.
- The option is assigned: If Amazon’s price falls below the strike price, the investor buys the stock at that price, effectively acquiring Amazon at a discount when considering the premium collected.
This strategy appeals to investors who are comfortable owning a particular stock at a given price and enjoy the added benefit of premium income while they wait for a potential entry.
1. Why a cash-secured put on amazon makes sense during earnings season
Selling a cash-secured put on Amazon around earnings season offers two distinct advantages: income generation and the potential for a discounted entry into the stock.
- Attractive entry point: By choosing a lower strike price (e.g., $180), investors can set a price below Amazon’s current level of $188.45, aligning with a strategic entry during high volatility.
- Premium income: If the option is sold at a premium, such as $4.75 per share (or $475 for one contract), this income is collected upfront and kept as profit if the stock remains above the strike price by expiry. This translates to a return of around 2.6% for a 32-day period on the reserved capital.
- Effective cost basis: Should Amazon’s price fall and the option be assigned, the investor’s effective entry price would be the strike price minus the premium collected, offering a discount from the original level.
Cash-secured put flowchart
To better understand this strategy, here’s a flowchart summarizing the steps involved: 2. Why volatility around earnings is ideal for selling puts on amazon
Earnings events can generate substantial volatility for Amazon, driving up options premiums due to heightened implied volatility (IV). This elevated IV provides a unique opportunity for put sellers to capture higher-than-average premiums. Here’s why timing the strategy around earnings events can be beneficial:
- Volatility advantage: During earnings season, implied volatility for Amazon’s options often increases for certain strikes. This elevated IV means investors can capture a higher premium by selling puts, capitalizing on market anticipation or post-earnings reactions.
- Premium collection opportunity: With volatility elevated around the earnings period, the premium collected from selling a put provides an immediate income boost. Even if Amazon’s price remains above the chosen strike price, the investor keeps the entire premium, representing a strong return on the cash held in reserve.
Amazon’s historical price chart (5-year view)
For context, Amazon’s 5-year price chart provides a view of the stock’s longer-term trajectory, helping illustrate the positioning of this cash-secured put in a broader trend. 3. Detailed breakdown of the cash-secured put trade on amazon
- If not assigned: The investor keeps the premium collected, representing a return on the reserved cash.
- If assigned: Should the stock fall below the strike price, the investor buys Amazon shares at an effective cost basis of $175.25, with the premium helping to offset the entry cost.
Strategy window screenshot of the cash-secured put
To give readers a precise view of this setup, here’s a strategy window screenshot with details on the premium, breakeven, and profit zones. 4. Comparing cash-secured puts with limit orders
An alternative to selling a cash-secured put would be placing a limit order. However, there are some key differences:
- No income while waiting: A limit order at a specific price generates no income while the cash remains idle. In contrast, a cash-secured put collects premium upfront, providing a return while waiting.
- Lower effective entry: If the option is assigned, the effective entry price with a cash-secured put can be below the chosen strike price, whereas a limit order would have an entry price at the set level.
- Flexibility in outcomes: With a put, the seller can benefit if the price remains above the strike, collecting income without buying the stock.
This comparison shows how cash-secured puts allow for both income generation and a potentially better entry price.
5. Understanding the risks of cash-secured puts
While cash-secured puts can be rewarding, there are associated risks, especially during earnings:
- Assignment risk: If Amazon’s earnings disappoint or volatility increases unexpectedly, the stock may drop sharply, leading to assignment at a price above the market. Investors should be prepared to hold Amazon at their effective entry price.
- Capital commitment: With cash reserved, investors may miss other opportunities, as this capital is effectively locked up for the option’s duration.
- Volatility crush post-earnings: After earnings, implied volatility typically drops, potentially reducing the option’s value. This means investors looking to close early might see reduced premiums.
- Market and sector risks: Broader market conditions, economic trends, or tech-sector headwinds could impact Amazon’s price, adding risk.
Conclusion
Selling a cash-secured put on Amazon provides investors a chance to earn premium income while setting up a favorable entry point if the stock declines. By timing this strategy around earnings, investors can leverage high volatility to create income potential.
Selling cash-secured puts is just one part of a broader income strategy known as the “wheel strategy.” If assigned, the next step is to sell covered calls on Amazon shares. Stay tuned for our upcoming article that will dive deeper into the wheel strategy and how it can create consistent income.| Check out these guides and case studies: |
|---|
| In-depth guide to using long-term options for strategic portfolio management Our specialized resource designed to learn you strategically manage profits and reduce reliance on single (or few) positions within your portfolio using long-term options. This guide is crafted to assist you in understanding and applying long-term options to diversify investments and secure gains while maintaining market exposure. |
| Case study: using covered calls to enhance portfolio performance This case study delves into the covered call strategy, where an investor holds a stock and sells call options to generate premium income. The approach offers a balanced method for generating income and managing risk, with protection against minor declines and capped potential gains. |
| Case study: using protective puts to manage risk This analysis examines the protective put strategy, where an investor owns a stock and buys put options to safeguard against significant declines. Despite the cost of the premium, this approach offers peace of mind and financial protection, making it ideal for risk-averse investors. |
| Case study: using cash-secured puts to acquire stocks at a discount and generate income This review investigates the cash-secured put strategy, where an investor sells put options while holding enough cash to buy the stock if exercised. This method balances income generation with the potential to acquire stocks at a lower cost, appealing to cautious investors. |
| Case study: using collars to balance risk and reward This study focuses on the collar strategy, where an investor owns a stock, buys protective puts, and sells call options to balance risk and reward. This cost-neutral approach, achieved by offsetting the cost of puts with the premiums from calls, provides a safety net and additional income, making it suitable for cautious investors. |
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
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