Investment and Options Strategist
Summary: During earnings season, selling cash-secured puts on Amazon can allow investors to capture premium income while setting up a potential discounted entry into the stock. This article explores how the strategy works, its advantages during volatile periods, and key considerations to help investors make informed choices.
Earnings season often brings heightened volatility to major stocks, and Amazon is no exception. For investors looking to gain exposure to Amazon at a discount, this volatility creates an ideal opportunity. A cash-secured put is a strategy that allows investors to “get paid to wait” by collecting premium income while positioning for a discounted entry if assigned.
This article explores how selling a cash-secured put on Amazon, with an example using the November 29, 2024, expiry, can capitalize on the elevated volatility surrounding earnings events. The options prices, premiums, and strike prices mentioned throughout the article are based on the conditions at the time the data was captured, and are provided purely as educational examples. By the time of publishing, actual prices and premiums may differ.
Important note: Investors should conduct their own due diligence and make independent decisions on expiry dates, strike prices, and other parameters to align with their personal investment goals and risk tolerance.
The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
We’ll walk through the details of this strategy, how it compares to using a limit order, and the associated risks and benefits.
For those unfamiliar with the strategy, a cash-secured put is a conservative options strategy often used by investors who are interested in buying a stock at a specific price but would prefer to “get paid to wait” rather than placing a simple limit order. Here’s how it works:
When selling a cash-secured put, an investor agrees to buy shares of a stock at a predetermined price (known as the strike price) if the option is exercised. In return for taking on this obligation, the investor receives a premium upfront, which serves as income regardless of whether they end up buying the stock.
The “cash-secured” part of the strategy means the investor sets aside enough cash in their account to cover the purchase if they are assigned the shares. For example, if selling a put with a strike price of $180 on Amazon, they would reserve $18,000 (100 shares x $180) to buy the shares if assigned.
There are two possible outcomes:
This strategy appeals to investors who are comfortable owning a particular stock at a given price and enjoy the added benefit of premium income while they wait for a potential entry.
Selling a cash-secured put on Amazon around earnings season offers two distinct advantages: income generation and the potential for a discounted entry into the stock.
Earnings events can generate substantial volatility for Amazon, driving up options premiums due to heightened implied volatility (IV). This elevated IV provides a unique opportunity for put sellers to capture higher-than-average premiums. Here’s why timing the strategy around earnings events can be beneficial:
Amazon’s historical price chart (5-year view)
For context, Amazon’s 5-year price chart provides a view of the stock’s longer-term trajectory, helping illustrate the positioning of this cash-secured put in a broader trend.
An alternative to selling a cash-secured put would be placing a limit order. However, there are some key differences:
This comparison shows how cash-secured puts allow for both income generation and a potentially better entry price.
While cash-secured puts can be rewarding, there are associated risks, especially during earnings:
Selling a cash-secured put on Amazon provides investors a chance to earn premium income while setting up a favorable entry point if the stock declines. By timing this strategy around earnings, investors can leverage high volatility to create income potential.
Selling cash-secured puts is just one part of a broader income strategy known as the “wheel strategy.” If assigned, the next step is to sell covered calls on Amazon shares. Stay tuned for our upcoming article that will dive deeper into the wheel strategy and how it can create consistent income.| Check out these guides and case studies: |
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| In-depth guide to using long-term options for strategic portfolio management Our specialized resource designed to learn you strategically manage profits and reduce reliance on single (or few) positions within your portfolio using long-term options. This guide is crafted to assist you in understanding and applying long-term options to diversify investments and secure gains while maintaining market exposure. |
| Case study: using covered calls to enhance portfolio performance This case study delves into the covered call strategy, where an investor holds a stock and sells call options to generate premium income. The approach offers a balanced method for generating income and managing risk, with protection against minor declines and capped potential gains. |
| Case study: using protective puts to manage risk This analysis examines the protective put strategy, where an investor owns a stock and buys put options to safeguard against significant declines. Despite the cost of the premium, this approach offers peace of mind and financial protection, making it ideal for risk-averse investors. |
| Case study: using cash-secured puts to acquire stocks at a discount and generate income This review investigates the cash-secured put strategy, where an investor sells put options while holding enough cash to buy the stock if exercised. This method balances income generation with the potential to acquire stocks at a lower cost, appealing to cautious investors. |
| Case study: using collars to balance risk and reward This study focuses on the collar strategy, where an investor owns a stock, buys protective puts, and sells call options to balance risk and reward. This cost-neutral approach, achieved by offsetting the cost of puts with the premiums from calls, provides a safety net and additional income, making it suitable for cautious investors. |
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