Amazon.com (AMZN) to debut iTunes rival soon

Amazon.com Inc. (NASDAQ: AMZN) shares are jumping today after a report that the company plans to launch an online music service in September as an alternative to Apple's (NASDAQ: AAPL) popular iTunes mp3 store. If you think this means good times for the company, then now could be a good time to look at a bullish hedged trade on AMZN.

After hitting a one-year high of $89.00 in July, shares have trickled downward over the last month. AMZN opened this morning at $80.00. So far today the stock has hit a low of $79.70 and a high of $80.49. As of 11:00, AMZN is trading at $80.40, up $1.72 (2.2%). The chart for AMZN looks bullish but deteriorating, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.

For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $67.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just 7 weeks as long as AMZN is above $67.50 at October expiration. Amazon would have to fall by more than 16% before we would start to lose money.

AMZN hasn't been below $67.50 at all in the past year and has shown support around $77.50 recently. This trade could be risky if the company's earnings (due in late October) disappoint, but even if that happens, this position could be protected by multiple levels of support between $68 and $72, plus the stock's 50-day moving average, which is around $75 and rising.

Brent Archer is an options analyst and writer at Investors Observer.