Investment Review №352. Playing Defense

Trade Thesis

A bet on an Amazon (AMZN) recovery after a pullback from post-earnings highs through the purchase of a $265-strike call option. The company delivered a strong second quarter: revenue reached $200.6 billion, operating income $27.5 billion, and AWS growth accelerated to 37% year over year. Pressure on the stock is mainly tied to heavy AI-infrastructure spending and free-cash-flow concerns. If AWS momentum remains strong, the shares could recover toward the $285–295 area over the next several weeks.

Key Arguments

• AWS growth accelerated sharply. Cloud revenue rose 37% year over year to $42.2 billion. Strong demand for cloud and AI computing suggests Amazon’s large infrastructure investments are already supporting growth in its most important profit engine.
• Financial performance remains strong. Total revenue reached $200.6 billion and operating income rose to $27.5 billion. AWS growth is being accompanied by higher profits, so the current investment cycle is producing measurable financial benefits rather than relying only on future expectations.
• The pullback improved the entry point. After a strong initial reaction to earnings, the stock retreated from its post-earnings highs. The thesis does not require Amazon to reach the long-term analyst target: a recovery toward $285–295 would be sufficient to materially increase the value of the near-ATM call.

Risk Management

If AMZN closes above $265 but below $275.50 at expiration on 10/16/2026, the investor will realize a partial loss depending on the final stock price. If the stock closes below $265, the maximum loss equals the premium paid — $1,050. If the stock closes above the breakeven of $275.50, the position becomes profitable. The base case is to hold until the target premium of $23.00 is reached.

Key risks include continued pressure on free cash flow from Amazon’s large capital spending program and the high growth expectations already embedded in AWS. A slowdown in cloud growth or concerns about the returns on AI investment could trigger further downside. Additional risks include a technical break below the $253–255 area and time decay if the shares trade sideways.

Trade parameters

P/L of the Option Strategy