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Nov 2019: AMZN $1820- $1800 Bear Put Spread

Stock

AMZN

Trade Structure

$1820- $1800 Bear Put Spread

Trade Date

11/27/2019

Expiration Days

12/27/2019

Trade Rationale

The markets have been roaring higher and higher for 6 weeks and all stocks in my watchlist are over-extended to the upside. AMZN was beaten down for many days but then bounced right back up piercing the upper Bollinger Band. ADX however is not supporting this sudden upward price movement and is showing weakness. We paid $870 for this put spread and hope to double our money in the next 30 days.

Trade Selection Criteria

Overall market movement

With S&P 500 making new all time highs week over week for 6 weeks now, the overall market and practically every stock in my watchlist is making new highs. AMZN was beaten down but bounced right back up with the market. But the ADX is not supporting this sudden upward price movement.

No Earnings or Significant News

Earnings are behind us and were announced on 10/24. There is no significant news or earnings event during our trade cycle.

Bollinger Bands outside Keltner Channels

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

RSI Analysis

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

ADX Analysis

ADX is clearly not supporting the upwards price movement we saw in the last week. This in combination with all other observations, give us a good reason to put on a mean reversion trade.

Trade Analysis

As predicted by our technical analysis, AMZN sharply reversed and gave up its earlier gains, bottoming out on 12/08. However, it started going back up after that. But we were still able to close the position for a profit of $899 on 12/16. NOTE: As mentioned in my book, I don't try to "fix" my losing trades. I simply close out when I lose 50% of my initial outlay. However, I do actively close my profitable trades when I see the profit. If we had been lazy and waited until expiration, we would have got totally annihilated. Notice what happened on 12/27 expiration day.

Trade Outcome

Winner

Profit/Loss

$899

Beginning Account Balance

$16,200

Ending Account Balance

$17,099

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