Is Amazon.com Ready for a Pullback?

Amazon.com AMZN has been on a huge run, up 8 of the last 9 days.  This run has been so quick that it has now pushed Amazon.com outside of its upper bollinger bands.

Bollinger bands use the 20 day moving average and measure two standard deviations on either side.  Two standard deviations will hold 95% of all the stocks movement.  Only 5% of the time will the stock trade above or below the two standard deviations.  That 5% is what we want to focus on in these setups.  

This phenomenon is usually caused by non-stop buying over several days.  When this happens it will push the stock out of the upper bollinger band which lets us know that this stock is overbought and overextended.  When the stock finally pushes through the bollinger band it is a good indication that this run could be coming to an end.

It looks like the run in Amazon.com could be coming to an end.  Since Amazon.com is at $300 we are going to switch to trading options over the actual stock.  One thing to note is that they report earnings July 22, 2013.  We will want to avoid holding our position over their earnings announcement.  

Since earnings is coming up that means volatility will be climbing.  This is a good reason to buy options instead of selling options.  

Taking a look at their volatility chart we can see that implied volatility has a long way to go to reach the spikes created for earnings.  Again, this is why we are not selling options here.

Since we want this around earnings we are going to focus on the July weeklies expiring in 18 days (on July 26, 2013).  The rise in volatility of these options should keep the time decay (theta) at bay.  A rise in volatility will outweigh the effects of time decay.

For the trade we are looking at the 280 Puts trading at 6.50/6.65.  These puts are out of the money but 280 makes for a good target on this pullback.  We are looking to capture a 50percent profit ($325) on this trade.  Again, we do not want to hold this option through earnings so we will close out the trade no later than July 22nd.