Option Play for an Amazon.com (AMZN) Breakout

Amazon.com AMZN has been in a holding pattern for a month. It has had some big swings higher and steady run downs but basically it hasn’t moved.

Amazon.com rocketed from $270 into the $310s in the matter of a couple of weeks. That run is now seeing a break as we begin to consolidate and flag sideways. Right now Amazon.com is in a big bull flag, and it looks prime to breakout.

One way to trade this is to just buy the break of the flag at $300 which is an excellent way to play this setup. However, the options market offers other plays.

Right now implied volatilities are at a 2 year low. This is for good reason, since realized volatilities are also at a 2 year low. With volatilities on the low side the objective is to get long options. In fact the ideal play here is straight calls. Trading straight calls and puts is a great way to take advantage of low volatility. These are the August options expiring in 10 days on the 23rd.

The 305 calls are out of the money which will react better to a change in volatility and a change in price. If Amazon.com can run to $302 with an increase in volatility of just 2 percent, there could be a 70 percent profit by Friday. If Amazon.com has not made the move by Friday we will look to exit this position. 

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