Hedging Amazon

Technical analysis and risk management

Gigantes.

This is an update on Amazon. The last time I wrote about the position was back in April, before earnings. Let’s study the chart to see what has happened since then. Below is the weekly-candle chart.

As we can observe, Amazon did well after earnings, and for a moment it looked like the stock was going to break out of the wedge structure I introduced in the first entry. It didn’t. The move failed, the price went back inside the wedge, and last week it appears to have broken down through the lower part of the structure, the circled area.

Now, a quick detour because I want to make something clear.

My conviction in Amazon is strong enough that, in the strategy, which is persisted in Kova, losing shares is considered a failed state. No paper hands origami here.

I always want to own the stock, regardless of what the chart is doing in the short term. The chart helps me decide how much risk I want to carry at a given moment.

Amazon reports earnings this Thursday, July 30. Understanding anything can happen to the price in the short term, I have to remain consistent with my interpretation of the chart. My current technical bias is bearish.

So what am I doing?

I need to cover more. That means selling more covered calls.

In my covered-call strategy, the technical bias is one of the inputs the strategy uses to determine how much of the position should be covered. With a bearish bias, the target moves toward roughly 40% to 60% coverage.

At a high level, this means selling partial covered calls while keeping a meaningful part of the position uncovered.

Here is the activity so far this year:

The most important hedge is highlighted in the chart below.

On May 12, as the stock retraced into the upper boundary of the wedge, I increased the hedge by selling the June 18 $235 covered calls. About a month later, I closed the position after capturing roughly 80% of the available premium per contract. This is also an example of what I mean by captured volatility.

The avid reader will notice that the August 21 $190C contract remains open. Stock is currently trading ~ $232/share.

So yes, AMZN is trading lower than the last time I wrote about it, but the premiums collected have already created some cushion around the position. More importantly, I’m following the plan. If my technical bias is bearish, so be it. I can’t ignore what the chart is telling me simply because my fundamental thesis is very bullish. That conviction is what allows me to own the business through the long-term roller coaster.

What happens after earnings?

It’s already coded in the strategy.

If AMZN goes up, great. The uncovered position gains value. I’ll have time to manage the calls. I’m OK giving some premium back to the market to slowly “climb-up” the ITM lots. If my bias turns bullish, I’m allowed to deploy cash and rebuild some of the delta “lost” through the hedge.

If it goes down, the premium cushions part of the move. There’s also a psychological benefit. The outcome is easier to process when risk was recognized and adjusted for in due time.

This is it for today

Juan