Ocado shares are plunging after Amazon announced a huge new tie up with Morrisons

Amazon just signed another major distribution deal with Morrisons, one of Britain's biggest supermarket chains, which threatens online grocery group Ocado.

Ocado's shares are crashing as a result. OCDO stock is down more than 6% around 10.30 a.m. GMT (5.30 a.m. ET) as investors try to figure out the potential damage that Amazon might do to Ocado.

Under the agreement - which extends Amazon's existing relationship with Morrisons - Amazon Prime customers will be able to order same-day grocery deliveries from Morrisons via Amazon.

The new "Morrisons at Amazon" service will allow Amazon Prime customers in and around London to order the full range of Morrisons' products online via Amazon's Prime Now app.

"As food maker and shopkeeper, we have unique skills to help build a broader new Morrisons through capital light growth. 'Morrisons at Amazon' is another exciting joint opportunity and makes Morrisons good quality, great value-for-money products available to even more customers," Morrisons' Chief Executive David Potts said.

This has pushed Ocado's famously sensitive stock off a cliff on Wednesday, as the chart below illustrates:

Investors in the online-only grocer are terrified of Amazon's movements in the food shopping market for one simple reason - namely that when Amazon enters a new business area, it normally wins.

In its history, whenever Amazon has turned its hand to new businesses, it has generally enjoyed huge success - other than of course the Fire tablet. The American retail giant has such a huge resource pool that should the initial experiment prove a success, it has the capacity to cause a huge disruption to Ocado.

Amazon is a multi-billion dollar global giant, whereas Ocado - while pretty successful in its current business - has yet to expand outside the UK, and is still largely focused in one small part of the nation.

"For Morrisons this broadens the offer and gives them more ways to reach customers online where they are still in the early stages of development. For Amazon this is one of a vast number of things they are trialling," said Bernstein analyst Bruno Monteyne, according to a Reuters report.

Ocado also has a deal with Morrisons that incorporates the delivery of Morrisons products to customers, but as previously mentioned, it does not have the financial clout of Amazon, so the deal is less significant.

Another driver of the fall on Wednesday is the fact Ocado is one of the most heavily shorted stocks in the UK, reflecting fears about its future prospects in the markets. Almost a fifth of its shares are held by investors betting the price will fall, according to Castellain Capital's Short Tracker site.Blackrock, Discovery Capital, GMT Capital, JP Morgan Asset Management, and Marshall Wace are among the big holders of short positions in the com