Amazon.com Inc. (AMZN) is a stock that attracts hardcore believers and skeptics because of its aggressive e-commerce business model. The company avoided profits in order to gain market share. Although this is typical for early-stage companies, Amazon has continued to follow this path more than 20 years after its establishment. Amazon’s stock price has been on an upward trend for most of its existence because it has found investors with the same vision as founder Jeff Bezos.
- Amazon continues to pursue its growth strategy, putting growing market share and revenue before profitability.
- For investors interested in shorting stocks, the easiest way to take advantage of the expected decline in Amazon’s stock price is to short stocks through a broker.
- Another option is to buy put options on stocks.
- The main risks of shorting stocks (including Amazon) are borrowing costs and the possibility of unlimited losses.
For those who do not believe that Amazon can begin to convert its market share into profit, there are many ways to short stocks. If investors do not believe that the company will be able to continue to gain market share by launching new products, or that market share will be converted into revenue at some point, Amazon’s stock will definitely fall sharply. High momentum stocks that fail to meet investor expectations can create huge profits for short sellers.
The easiest way to profit from the decline in Amazon’s stock price is to short the stock with a broker. Shorting stocks through a broker involves borrowing stocks and then selling them on the market or with limit orders.
At some point in the future, the stock must be repurchased to end the transaction. When stocks are repurchased, if the price rises, investors will lose money on short selling. If the stock price falls, short sellers will profit from the difference between the selling price and the repurchase price.
The risks involved
However, there is considerable risk in shorting stocks. Over time, there is a borrowing cost. For liquid stocks like Amazon, this fee is moderate, but if demand for short stocks is strong, the fee may increase. Another risk of shorting stocks is that the shorting mechanism is not good for short sellers.
For long positions, the investor’s maximum loss on the stock is 100%. When going short, theoretically, the loss is unlimited. If the stock drops to 0, short sellers can make up to 100%. Therefore, short selling is only suitable for experienced traders who understand the risks involved.
Another risk of shorting stocks is the possibility of short squeeze. Highly valued stocks such as Amazon tend to attract short sellers, especially when the stock price or the company shows signs of faltering.
This creates its own risks, because bullish catalysts can bring huge gains. As short positions are forced to cover to limit losses or due to risk management, returns can become quite exaggerated. Of course, short covering will lead to more demand, pushing it up.
Therefore, short sellers should have a plan to deal with short positions and contrarian rebounds. One tool that can be used to assess the likelihood of a short squeeze is to check the short liquidity of the stock, which can be found through a broker.
Buy put option
Another way to profit from falling stock prices is to buy put options. The advantage of buying a put option is that the trader’s biggest loss is the amount he paid for the put option. A put option is a contract that sells stocks at a specific price at a specific time. For example, someone can buy a put option and sell 100 shares of Amazon stock for $3,500 in January 2021.
On the expiration date of the option, if Amazon’s stock price is higher than $3,500, the option will be worthless when it expires. If the stock price closes at $3,000, the option is worth $500. Obviously, put options provide considerable leverage for highly conviction traders, as opposed to shorting stocks. The downside is that traders need to correctly grasp the direction and timing of the stock in order to make a profit.