Selling an options ‘strangle’ on this retail giant on Mike Khouw’s holiday shopping list
Continuing the theme of our holiday shopping list of stocks is particularly appropriate, given that this is one of the most significant shopping weeks of the year. “Black Friday” is the informal name for the Friday immediately following the U.S. Thanksgiving holiday, which marks the traditional start of the holiday shopping season and is known for major retailer discounts, extended store hours and a surge in consumer spending across both physical stores and e-commerce platforms. Historically, Black Friday meant large crowds lining up outside stores in the early morning to get access to unique Black Friday-only deals. Although much of this has shifted online in recent years, it remains one of the busiest brick-and-mortar retail days of the year. As online sales have become a dominant driver, platforms like Amazon, Walmart.com, Target.com and others now run multiday online events — you have probably noticed several have started already, and many will continue to (and through) “Cyber Monday” — what began about two decades ago as the e-commerce equivalent of Black Friday. A couple of retailers did well last week, including Ross Stores (ROST) — up 8.4% — and Walmart (WMT) — up 2.8%. However, in the spirit of seeking deals, we’re considering Amazon (AMZN) , which fell 6% last week and is now 13% below its all-time closing high of $254 on Nov. 3. As investors look ahead to 2025 and beyond, the bullish case for AMZN rests on the structural advantages in AI infrastructure, and a multi-engine business model — e-commerce, advertising, cloud computing, logistics and digital services. It’s particularly interesting to me that Amazon’s retail segment has faced criticism for thin margins, while Walmart’s thin margins are characterized as a margin-expansion story. For perspective, Amazon is trading at ~23.5x forward earnings, while Walmart is trading at 36.5x. If we assume that both companies can achieve similar fulfillment optimization and cost-to-serve in online retail, does Walmart deserve a premium to the broader market, while Amazon deserves a discount? These operational gains are structural, not cyclical — and they compound as volumes rise. Meanwhile, AWS remains the crown jewel. Consensus for AWS sales growth on a constant currency basis is nearly 18.9% year over year, nearly $128 billion. Amazon’s advertising business has also become a major profit generator and is growing even faster. Consensus advertising services revenue of more than $68.4 billion, if achieved, would represent 21.6% year-on-year growth, well above industry peers’ growth. The trade As the share price has fallen, albeit modestly, since earlier this month, options prices have also risen slightly. Because it’s likely the stock will encounter some resistance at its prior highs, one way to take advantage of this is to sell some upside calls, such as the January $245s. Because we also like the stock long term, we can sell some downside puts at strikes where we would consider purchasing stock, such as the January $200s. Selling both — selling a strangle — would collect more than $7.50 in premium as of Friday’s closing prices, or roughly 3.4% of the current stock price in about seven weeks, a standstill yield of 24%. If the stock declines, we may be “put the stock” at the $200 put strike, but net of the premium collected, our purchase price will be $192.50, a discount of more than 12.5% from Friday’s closing price and almost 25% less than its recent highs. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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