Amazon (AMZN) shares dropped after the cloud giant offered a disappointing forecast on both the top and bottom lines during its earnings call in early August. While the stock has since recovered much of its decline, it appears to be facing significant resistance around the $180 price level. This leads to an intriguing trade set-up known as the "gap-fill-rejection trade.
" When a stock experiences an exaggerated drop in price — often following earnings announcements, major analyst rating changes, or top management shakeups — it creates a price gap. It's a widely recognized phenomenon that these gaps tend to fill over time. However, when gaps are caused by fundamental reasons, the previous closing price often becomes a strong resistance level, adding to the complexity and appeal of this trade setup.
In the case of AMZN, the gap occurred near the $180 price level. As shown in the six-month chart below, AMZN is encountering resistance at this level, and the stock is struggling to break through. Additionally, the relative strength index (RSI) is indicating a downtrend, further suggesting that the "relief rally" in AMZN may be losing momentum.
The trade With AMZN trading at $175 at the time of writing, I am considering opening a bear put spread by buying a 180 strike put option and simultaneously selling a 175 strike put. This setup is known as a "bear put spread," or a "put debit spread," since it is established for a net debit. If AMZN catches a bid and trades around $177, the spread can be purchased for $250 (i.
e., a 2.50 limit price).
Here is my exact trade setup: Bought $180 put Sep 13th expiry Sold $175 put Sep 13th expiry If AMZN is trading at $175 or below on the expiration date, this trade will generate a 100% return on investment (ROI) based on the amount risked. Note that Nvidia reports earnings on Wednesday after the market close, which will likely have a significant impact on all tech stocks. Therefore, it might be prudent to consider opening this trade only if NVDA's earnings cause the Nasdaq to turn red.
-Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading using Options and Technical Analysis Youtube, X: @TheMeanTrader 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 .
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