Amazon.com (AMZN, $73.10, up $1.66) is notoriously tight lipped about sales when it comes to Wall Street inquiries and at times they can report some amazing revenue numbers. On a day where there was not much “good news” brewing, it was one of the only stocks that had a decent day on Wall Street Monday. This morning, the stock is up another 2%.
It has been an up-and-down year for the bulls but shares of Amazon have kept on rolling despite the volatility we have seen over the last six months. In fact, the stock hit a 52-week low of $34.68 on November 20th and has nearly doubled since. So what gives and why is Amazon looking like it wants to go to $100?
By now, I’m sure you have heard of Amazon’s Kindle, either from me or Oprah, and the new Kindle 2 was released in February. In case you haven’t, Kindle is a small, quirky gadget that could mirror what the iPod did for music. Although Amazon actually has an application for Kindle to use with the iPhone, sales are booming. Don’t let that first sentence worry you, Amazon has been planning to get its e-book offerings on a variety of platforms.
Kindle has the largest online reading selection by a significant margin. The offerings include more than 250,000 books, magazines, newspapers, and blogs, including many on the current New York Times Best Sellers.
People are buying the Kindle because it actually feels like a book. Yes, smartphones may take away from some of the sales but if you are really a book worm you are going to want the Kindle. The technology does not require backlighting, which makes them easier to read in most light conditions and that have a lot longer battery life (2 weeks). Other Kindle 2 features includes a new “text-to-speech” feature that uses a computerized voice to read any book to you in either a male or female voice.
There are some circles that say Kindle sales are averaging 55,000 a month. That may be a little higher or significantly higher. Last year, analysts were guessing Kindle could generate between $400 million and $750 million in revenue for Amazon by 2010. Now I’m hearing whispers of $1.2 billion by 2010.
Amazon does say the Kindle 2 is the number-one seller on its US electronics website and the second version was unveiled on February 6th. Demand was so strong at first which caused delays but it is currently “in stock” according to Amazon’s website which I just checked 5 minutes ago.
This is all good news of course but we are more concerned with the April 80 calls (ZQNDP, $1.36, up $0.30). We got into this position on Friday at 90 cents and these calls traded in the 80’s yesterday. With today’s gains, that gives you at least a 50% return.
There is a couple of points I wanted to make with this trade and hopefully it helps with your options trading. To start, directional option trading is risky. And right now we are in a trader’s market. There are times when picking option trades will seem easy and there are other times where you have to be quick on your feet. I still have high hopes for this trade but keep your profits in focus and set a stop of $1.00-$1.10.
Also, I wanted to talk about the number of contracts you buy when opening a position. If you have a small trading account ($2,000 and under), it is tough to make money. That is still a good amount of change but if you only buy 3 contracts or less when making these trades then it’s almost defeating the purpose of trading. When you buy 10 contracts it’s a different story.
If you buy 3 contracts of an 80 cent option it may only cost you $240 but you will spend $15 (average) in commissions both ways to buy and sell. That knocks $30 off your profits. If you buy 10 contracts it will cost you $800. If you only have $2,000 that is half of your account locked up on one trade if you buy 10. If you only buy 3 then it is a little over 10% of your portfolio that you are only risking.
Now here is the other huge difference. A return of 50% is great and it would take a lot longer to make that much money in a few days when buying stock. As you know, stock is way move expensive to buy than cheap out-of-the money options. If you only buy 3 contracts at 80 cents and you have a 50% profit, you invested $240, made 50% but you only have $120 minus the $30 you might pay in commissions. If you had bought 10 contracts at 80 cents then you put up $800 but made $400 minus $30.
Of course, the losses are that much worse but you can see the difference. Something to think about. Also, if you buy 25 contracts and the option you are in goes up just 10 cents, you make $250. There are trades like this everyday in the market and that is where I want to get you.
I recommend a lot of plays but these types of trades I do and I don’t recommend in the blog. If I say in the blog “I just picked up xyz at such and such a price” then that may mean I am only trading that option for a couple of hours. But, if I mention an option trade, I will keep track of it, good or bad.
So remember some of these things when reading the blog and making trades. Think about how much money you are risking, what your targets are, what you can afford to lose, and always set stops/ exits. And make sure you use limit orders. This will save you a ton of money.