A Bearish Option Strategy for Amazon?

A bearish option play on Amazon? Are you kidding? No. The following article by David Zanoni of Seeking Alpha explains exactly why he thinks you should be betting on Amazon to drop. I hate to say, I have to agree. Not only for the reasons he gave, but also because of what’s going on in the great state of Texas.

Starting June 1st, Texas residents are going to have to start paying sales tax on everything they purchase on Amazon. For me that means everything I buy though Amazon (which is a ton of stuff) is going to jump 8.25%. Ouch!!!!! I don’t know about everyone else in Texas, but that’s enough to make me start looking elsewhere.

Now, don’t get me wrong – I like Amazon (AMZN) as a business. I think that it has many good deals from many reputable sellers. I use it occasionally when I need something that isn’t readily available at a neighborhood store. However, I think that the stock is extremely risky due to its overvaluation.

Early in 2011, Amazon stock began to grow faster than earnings, as shown in the 5 year Ycharts.com chart. We typically like to see forward PE ratios under 15, PEG ratios under 1, and price to book ratios under 3 for an undervaluation. However, Amazon has a forward PE ratio of 88.19, a PEG of 6.32, and a price to book ratio of 14.2. This shows a blatant overvaluation.

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The problem with overvalued stocks is that they are very sensitive to negative news which can cause large drops in stock price. On the bright side, Amazon also has large increases in stock price on positive news. Over the past year, the stock had price swings of 18% – 30% in both directions. The recent 21% surge in stock price was a result of the Q1 earnings beat. This surge places the stock close to its 2011 peak in an overbought condition.

The stock looks to be more of a trading vehicle in the short-term rather than as an investment. The chart shows many well-defined conditions of overbought and oversold stock prices that swing drastically in both directions.

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Go to Seeking Alpha for the rest of the story

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