While diversification is frequently hailed as a go-to tactic, it can also act as a drag in certain situations. Consider Amazon.com Inc (NASDAQ: AMZN) as a clear illustration. As a tech powerhouse, Amazon is undeniably involved in the drive to digitize virtually everything. Yet AMZN shares are only up roughly half a percent so far this year. You can point to a challenging retail backdrop. Even so, the security might present an intriguing opportunity for speculative, aggressive traders.
On the surface, the fundamentals don’t look supportive for AMZN shares. Earlier this week, Oxford Economics lead analyst John Canavan noted that although he’s cautiously optimistic about the U.S. economy, the market may be overly hopeful about how dovish the Federal Reserve will be. According to Canavan, the benchmark interest rate may be cut just one more time this year, not twice.
Separately, the Bureau of Labor Statistics issued a negative revision to jobs data, implying a softer consumer. Reinforcing this theme was Costco Wholesale Corp’s (NASDAQ: COST) latest earnings report. While the retailer topped expectations on both sales and earnings, same-store sales were a significant worry. Even excluding gas and foreign-exchange effects, the 6.4% growth rate marked a second consecutive quarter of slowing.
Still, amid the weak data there are notable positives that could help AMZN shares. First, within Costco’s results, e-commerce sales rose 13.5% versus the year-ago quarter. That pace indicates online purchasing is a vital channel for today’s shoppers — a trend that clearly benefits Amazon.
Second, the most recent U.S. Bureau of Economic Analysis figures showed the Personal Consumption Expenditures price index — the Fed’s preferred inflation gauge — increased 2.7% year-over-year in August. That remains elevated and has raised questions about future monetary policy. At the same time, the reading matched economists’ projections, which could be interpreted as a neutral-to-positive sign.
Using Risk Modeling To Extract An Opportunistic Trade In AMZN Stock
One major benefit of going long AMZN shares is that the underlying company is an economic mainstay. Consumers now rely on many of its services, from online retail to cloud infrastructure to groceries. As a result, like the S&P 500 benchmark, AMZN carries an upward bias.
However, this upward tendency is a product of the collective action of all price moves. My view is that specific sentiment regimes generate return patterns that exceed (or fall short of) typical expectations. Moreover, a regime shift might be indicated in advance through quantitative sequences.
For example, AMZN is exhibiting an uncommon sequence that, to my knowledge, hasn’t been widely discussed. Over the past 10 weeks there have been six up weeks (measured as the return from Monday’s open to Friday’s close) and four down weeks, with an overall downward tilt. Normally you would expect an accumulation-heavy run to be bullish, but in this instance AMZN is skewed toward the downside.
Since January 2019, this rare 6-up/4-down sequence has only appeared nine times, so it’s hard to claim strong statistical certainty from it. Still, what’s notable is that in seven of those instances AMZN moved higher relative to the anchor price (the starting point) over the subsequent five weeks.
Further, the median outcome tied to the 6-4-D sequence is materially higher than the median of all outcomes. In essence, AMZN could climb more than Wall Street expects, making vertical options structures potentially underpriced.
This approach to spotting mispriced trades is akin to risk management, essentially insurance. Instead of estimating the probability and potential cost of a hurricane, we’re estimating the probability relative to our anchor price — then gauging the potential payoff (reward).
To be clear, it’s far from a guaranteed method. In many respects, predicting hurricanes is easier because it’s scientific. The stock market? Because outside shocks can upend the model, movements can be chaotic. Nonetheless, blending risk-management frameworks with Markovian principles provides an empirical foundation for speculation.
Calculating An Aggressive Bull Call Spread
Over the next five weeks, the median price tied to the 6-4-D sequence is expected to be just above $230. That represents the 50th percentile, meaning half of the outcomes in the dataset fall above $230 and half below. Interestingly, market makers don’t see this level as a likely target — yet the empirical data imply otherwise.
Under this speculative construct, the 225/230 bull call spread expiring Oct. 31 looks most attractive. The trade entails buying the $225 call and simultaneously selling the $230 call, for a net debit of $200 (the maximum potential loss).
If AMZN rises beyond the short strike ($230) at expiration, the maximum gain would be $300, a 150% return. The breakeven is $227, roughly 3% above the price at the time of writing.
Again, the sample for the 6-4-D sequence is very small, so it’s impossible to be supremely confident in the setup. Still, the uncommon and counterintuitive quantitative signal makes AMZN worth a look.
This approach to quantitative analysis shares some principles with how AI models are revolutionizing science and medicine, where data patterns are used to predict outcomes in complex systems.
