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Creating an 11% “Dividend” on AMZN Stock Using Options

Barchart - Mon Apr 1, 6:00AM CDT

Amazon (AMZN) stock has long been a favorite of option traders and the stock has been on a great run since October last year.

The stock is currently above the 20, 50 and 200-day moving averages.

One bad thing about AMZN stock is that it doesn't pay a dividend. But what if we could use options to manufacture our own dividend?

Amazon Stock Dividend?

Let's say I have $18,000 to invest into AMZN stock, I could simply buy some shares and hope the stock rises.

But, if I want a more conservative play, I could sell a March 21, 2025 put with a strike price of $180 and set aside the $18,000 in case I am assigned on the short put.

That $180-strike put generates around $1,820 in option premium in just under 12 months.

So, my $18,000 investment into AMZN is giving me an 11.57% annualized "dividend".

What’s The Catch?

Well, much like owning AMZN shares, if the stock drops, I'm going to lose money in the short-term.

If AMZN is below $180 in March 2025, then I will be forced to buy 100 shares at $180. 

So if AMZN is below $161.80, at expiration the trade loses money. That’s the breakeven price when we take into account the option premium received.

But, if AMZN stays above $180 then I achieve an 11% per annum return when the put expires worthless.

Cash secured puts are a bullish strategy but are considered slightly less bullish than owning Amazon stock because the potential gains are limited to the premium received.

The second risk with the trade is that if AMZN stock goes on a huge rally, we miss out on any upside. The most we can make is the $1,820 from the option premium.

Greeks and Equivalent Exposure Level

The $180-strike put currently has a delta of 40, so selling this put gives an exposure roughly equivalent to owning 40 shares of AMZN stock, although this will change as the stock moves up and down.

One method which can help cut the risk is to turn the trade into a spread and buy a $130-strike put. This turns the trade into a bull put spread and cuts the risk from $18,000 to around $5,000.

There's lots of interesting scenarios you can create with options.

Company Details

Amazon.com is one of the largest e-commerce providers, with sprawling operations spreading across the globe. 

Its online retail business revolves around the Prime program well-supported by the company's massive distribution network. 

Further, the Whole Foods Market acquisition helped Amazon establish footprint in physical grocery supermarket space. 

Amazon also enjoys dominant position in the cloud-computing market, particularly in the Infrastructure as a Service space, thanks to Amazon Web Services, which is one of its high-margin generating businesses. 

Amazon has also become a household name with its Alexa powered Echo devices. 

Artificial Intelligence backed Alexa is helping the company sell products and services. 

The company reports revenue under three broad heads - North America, International and AWS, respectively. Amazon targets three categories of customers - consumers, sellers and website developers.

Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.


On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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