Dec 2019: AMZN $1895- $1865 Bear Put Spread

Stock

AMZN

Trade Structure

$1895-$1865 Bear Put Spread

Trade Date

12/27/2019

Expiration Days

01/24/2020

Trade Rationale

With the market on a tear and AMZN breaking some crazy holiday records, the stock shot up 9.5% in a day. The next day we see a Doji candle. Basically, a Doji mean that the sellers and buyer's are equal and there is indecision. Combine this with a big up or down day usually is a great indicator of a trend reversal or pullback.

Trade Selection Criteria

Overall market movement

Overall market has been on a tear for weeks. AMZN shot up 9.5% in 1 day on news that it had a great shopping season beating previous year’s records. 9.5% on a single day without an even like earnings is extreme. On the following day we see a nice DOJI candle representing indecision between buyers and sellers. A huge up/down move followed by a DOJI is usuall a great indicator for a mean reversion. Read about DOJI here

CHECK

No Earnings or Significant News

Earnings are behind us and the next earnings will be after our expiration cycle. Earnings scheduled for 01/30/2020

CHECK

Bollinger Bands outside Keltner Channels

Bollinger Bands are clearly outside Keltner Channels. Perfect time for a mean reversion trade 

CHECK

RSI Analysis

RSI is in over-extended territory, however not showing any clear signs of trend reversal.

INDETERMINATE

ADX Analysis

ADX is weak and indicates that there is no trend in place.

CHECK

Trade Analysis

You will notice that immediately after putting on the trade, AMZN initially went down, then bounced back up and after that kept whipsawing in a range. I have mentioned how I deal with these kind of trades in my book. I was still able to close this for an approx. 45% profit of $596

Trade Outcome

Winner

Profit/Loss

$569

Beginning Account Balance

$16,200

Ending Account Balance

$16,400

To follow along the strategies we use in the $25K challenge, we recommend that you get the strategy book which explains the whys and wherefores of our method. Get it here=> https://amzn.to/2MUOCE5

4 Comments

  1. Jeff McKinney
    Jeff McKinney on January 5, 2021 at 4:45 am

    Thanks for the detailed trade analysis. One question: If the profit was $569, why did the account balance only go from $16,200 to $16,400 (up $200)? Thanks!

    Reply
    • Nishant
      Nishant on January 5, 2021 at 6:48 am

      I have multiple trades on at the same time which affect the Net Liq of my portfolio. One trade could be a winner, another could be a loser which can cancel each other out.

      Reply
  2. Yao Yao
    Yao Yao on December 10, 2021 at 11:10 am

    Can I ask why you chose the range $1895-$1865 for the spread when the stock price was at $1880?

    Reply
    • Nishant
      Nishant on December 10, 2021 at 11:48 am

      I always buy ATM spreads. So, the stock price is always between the width of the strikes. This allows me to buy the trade for 1/2 of the width of the strikes.

      eg. If XYZ is at 197, and I am bullish, I would buy XYZ 195-200 Call Spread for $2.50. The potential profit of this trade would also be $2.50 (i.e I can double my money)

      Reply

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