The share price of internet retail giant Amazon.com, Inc. (AMZN) has trended lower for the past month. In this period, Amazon received a price target upgrade from independent investment bank Cowen while also experiencing notable outages of Amazon Web Services (AWS). The outage of the cloud infrastructure platform knocked several websites and heavily used services offline, from Netflix, Inc. (NFLX) to internet-connected smart devices such as Roomba vacuums.
Despite the mixed news, it appears at first glance that option traders are speculating that the Amazon share price will rise in the near term. However, it is necessary to further analyze the details of not only option trading numbers but the structure surrounding these trades, such as implied volatility. While the open interest is nearly even in terms of call options and puts, the implied volatility built into those prices suggests that traders and the market are positioned for the Amazon share price to fall.
In addition to recent news, Amazon stock could be trending lower for a variety of reasons. It is imperative to consider overall market sentiment and macro factors, especially considering the recent volatility in markets. Amazon is the largest individual stock by market cap in the consumer discretionary sector. Considering the Federal Reserve's recent acceleration of planned interest rate hikes to combat rising inflation, investors may be rotating into sectors that are considered "safer" havens, such as consumer staples.
- Amazon stock remains in a relative downward trend amid recent market volatility.
- The open interest appears slightly bullish at first glance but has bearish qualities on closer inspection.
- The share price of Amazon has recently closed below its 20-day moving average.
- Implied volatility appears to be pricing in a larger move to the downside.
- Volatility-based support and resistance levels allow for a larger move to the upside.
A comparison of technical analysis of share price movement combined with analysis of recent option activity can grant chart watchers valuable insight into the overall sentiment toward Amazon stock. The chart below illustrates the recent share price activity for Amazon stock as of Wednesday Dec. 22.
This chart depicts the price action of Amazon over the course of the past three months. Each candle represents one trading day. The blue lines are a historical volatility range formed by 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for Amazon stock. ATR is a standard tool for illustrating historical volatility over time. It is noteworthy that the outer bands in these indicators have been widening over the past two months. This implies that, while the Amazon share price has both risen and fallen over this time period, there is no consensus among traders as to traders on the direction of the stock.
Starting on the left of the chart, Amazon stock trended downward, as illustrated by the red arrow. This helps to highlight the way Amazon shifted from trading just above its 20-day moving average, in an above average range based on historical volatility, then moved lower into an extremely low range.
Then, in early October, the trend reversed, with the Amazon share price trending higher until mid-November, illustrated by the green arrow. It's interesting to note that Amazon stock experienced a relatively wide range during this time but ultimately closed in an extremely high range based on historical volatility.
The top of this range defined the beginning of the most recent downward trend, illustrated on the chart by the channel highlighted in blue. Amazon stock has remained in this channel for the past month. In this one-month period, the highest Amazon share price was $3762.15 in mid-November, highlighted on the chart by the green price balloon. The lowest Amazon share price was $3303.90 in mid-December, highlighted by the red price balloon.
It is notable that, in this one-month period, the share price for Amazon has decreased by 4.35%, underperforming State Street's S&P 500 Index ETF (SPY) and Invesco's Nasdaq-100 ETF (QQQ), which have fallen 0.85% and 2.39%, respectively. Amazon is a top-three holding of each of these major exchange traded funds (ETFs).
The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.
Recent trading volumes of Amazon favors calls over puts. On Tuesday, Dec. 22, 223,000 calls were traded, compared to 116,000 puts. At first glance, this is solidly bullish—however, trading volumes alone are only a portion of the story.
An analysis of open interest can provide greater context into the sentiment of option traders. The current open interest for Amazon features 485,000 calls against 513,000 puts. In contrast to recent trading volumes, the Amazon open interest appears slightly bearish at first glance. However, further analysis can provide deeper insights into option trader sentiment.
The open interest for weekly expiration options pales in comparison to the open interest for Jan. 21, the next monthly option expiration date. Excluding outliers at the extreme ends of the option chain, for options expiring Jan 21, the single highest open interest is on the $4,000 call, with 7,400. This represents 17% upside to the current Amazon share price over the next month and 6% upside to the 52-week high of $3773 of Amazon stock.
However, it's notable that the implied volatility for these options are falling, which indicates that these options are being sold more than being bought, which reflects a bearish sentiment toward Amazon stock. There are large spikes of open interest on the call side of the option chain for Jan. 21, both above and below the $4,000 strike price. These large spikes on open interest could represent option sellers or speculators betting on short-term upside to the Amazon share price.
Another aspect to consider is deeper aspects of implied volatility. Current implied volatility is 5% below its 20-day moving average, indicating that implied volatility is trending lower. Current implied volatility is also below its 20-day historical volatility, suggesting that option markets are predicting future volatility to trade below the most recent 20-day realized volatility.
These two points regarding volatility are crucial. Implied volatility generally increases in bearish markets. However, as current implied volatility vs. historical volatility is suggesting that option markets are predicting volatility to decline, this could be viewed as bullish toward Amazon stock.
While considering implied volatility, it is helpful to understand a concept known as volatility skew, Volatility skew is a measure of market implied volatility to both the upside and the downside, and the comparison of how they relate to each other. Current implied volatility skew is bearish toward Amazon. That's because the implied volatility for downside puts is increasing relative to upside calls, which suggests that the market is pricing in a larger fear of a downside move.
Potential Market Impact
Amazon stock can certainly be considered a bellwether stock, as it is the fifth largest stock by market capitalization. Amazon also represents the third largest holding of both SPY and QQQ. The stock could also be considered an indicator for the Consumer Discretionary sector, as Amazon is by far the largest holding of State Street's Consumer Discretionary Sector ETF (XLY).
The chart below compares the recent performance of Amazon with SPY, QQQ, and XLY. Each individual stock or ETF has its recent one-month trend highlighted in blue. Chart watchers can recognize that the downward trend of Amazon is the steepest on the chart, and the narrowest.
The share price of Amazon stock has retreated 4.35% over the past month, despite receiving a price target upgrade. Option traders appear to be positioning themselves for the share price to fall in the near term, and implied volatility suggests that market makers are pricing their options with a larger fear of a downside move.