Amazon.com Inc. (NASDAQ: AMZN) shares are declining after news of a new iTunes rental plan by Apple (NASDAQ: AAPL) threatens to take market-share away from the online-retail giant. According to a report on Bloomberg, AAPL will let iTunes users rent movies as well as buy them. AAPL plans in the near future to add Warner Bros. and Fox as suppliers. This could be a bad sign for AMZN, as AAPL could easily take advantage of its online-distribution system to take market share away. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on AMZN.After hitting a one-year low of $36.30 last January, the stock hit a one-year high of $101.09 in October. This morning, AMZN opened at $87.56. So far today the stock has hit a low of $82.05 and a high of $87.80. As of 12:30, AMZN is trading at $83.73, down $4.13 (-4.7%). 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 bearish hedged play on this stock, I would consider a February bear-call credit spread above the $115 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 4.2% return in 6 weeks as long as AMZN is below $115 at February expiration. Amazon would have to rise by more than 38% before we would start to lose money.
AMZN hasn't been above $101 at all in the past year and has shown resistance around $97 recently. This trade could be risky if consumer spending rises despite all the economic indicators we are seeing, but even if that happens, this position could be protected by resistance AMZN might find around $100, where the stock has topped out recently.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in AMZN.
Why do we have a weak dollar?
Holiday hiring slow for retailers
Closing Bell: What sell-off? (AIG, ABK, EPR, MBI, JAVA, ORCL, ERTS)
