Shorting AMZN Puts Makes Sense Here for Existing Shareholders, Given its High Put Premiums

Amazon (AMZN) produced a huge free cash flow result last quarter. This could push AMZN stock much higher as I wrote recently. 

Since Amazon still does not pay a dividend, shorting out-of-the-money (OTM) puts is a good income. This way existing shareholders can make income while they wait for the higher target price.

For example, I discussed this income strategy in a Jan. 23 Barchart article, “Amazon.com Stock Looks Undervalued to Investors Given Its Positive FCF.” 

At the time, AMZN stock was at $154.28 (today it's at $173.67). I recommended selling short the $148.00 strike price put options for $3.05 per put contract in the Feb. 16 expiration period.

Shorting OTM Puts for Income

This trade produced an immediate income of 2.06% (i.e., $3.05/$148.00). The $148 strike price was over 4% out-of-the-money (i.e., below the spot price of $154.28). 

Even before the puts expire this Friday, the strike price has fallen to a premium of just 1 cent, or effectively worthless. That means this trade was hugely successful for the short sellers of those puts.

In addition, after Amazon's results were released on Feb 1, 2024, I recommended selling short the $165 strike price put options in the Feb. 23 expiry period. 

At the time these put contracts were about 4% out-of-the-money (OTM) with AMZN stock at $171.81. The premium was $1.26 on the bid side, giving the short seller an immediate yield of 0.7636% (i.e., $1.26/$165.00). Today those puts are down to 39 cents. This is also another profitable trade, especially for existing investors. Here is why. 

Why Shorting Puts for Existing Investors Works

In this Feb. 1 article, I wrote that Amazon was likely worth substantially more. For example, Amazon's Q4 FCF was 6.40% of sales over the past year (i.e., $36.8b FCF/$541.8). 

This implies Amazon's FCF could rise to $41 billion by the end of 2024. That is based on sales forecasts of $641.5 billion in 2024 (i.e., 6.4% x $641.5b = $41.0 billion).

As a result, using a 1.5% FCF yield metric to value AMZN stock, its market value could rise to $2,733 billion. That is 51% higher than its existing $1,810 billion market cap today.

This implies that AMZN stock could be worth $262 per share (i.e., 1.51 x $173.67 price today).

In other words, it makes sense to short OTM put options here. This is because even if the shareholder has to buy more shares at the short strike price, it could be a bargain. Moreover, the extra income helps the shareholder to wait for the higher price.

Another OTM Short Put Play

Here is another short-put income play. The March 1 expiry period shows that the $167.50 strike price puts trade for $1.26 per put contract. 

That means that the short seller of these puts provides an immediate income of 0.752% (i.e., $1.26/$167.50). This is a very good income with just 18 days until expiration.

Here is how this works. The short seller must first secure $16,750 in cash and/or margin with their brokerage firm. Then, after entering an order to “Sell to Open” the investor makes $126 immediately. That gives the investor an immediate income of 0.752% (i.e., $126/$16,750). 

For example, if this income play is repeated 4 times every quarter the short seller can make $504 or 3.0% (i.e., $504/$16,750). That is a very good income for most investors.

The bottom line is that Amazon stock shareholders can make extra income while they wait for AMZN to rise.

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