New Trade – AMZN: Calendar Spread looks Prime

by Enis July 26, 2012 1:20 pm • Commentary

New Trade July 26th, 2012 at 1:20pm:  My view on the stock is similar to Dan’s comments in the preview below.  I think AMZN is a great company, but am less optimistic about the stock, particularly given the market backdrop.  Having said that, I was less excited playing earnings with a purely directional bet because AMZN does always seem to pull a rabbit out of its hat.  But when I saw the pricing for calendars, I couldn’t resist.  The risk/reward is very favorable.  The July 27th expiry weekly options are just priced too high relative to other expiries.  Dan has done calendar put spreads in INTC and FB in the last 2 weeks, and I am going to use the same structure for AMZN:


MY TRADE: AMZN ($218) Bought the July 27th weekly / August 195 Put Calendar for $1.30
  • Sold 1 July 27th weekly 195 put at $2.28
  • Bought 1 August regular expiry 195 put for $3.58

Break-Even on Aug Expiration:

If stock above 195 tomorrow at 4pm, the July 27th expiry 195 put expires worthless and I essentially own the Aug 195 put for 1.30.   What I would essentially like to happen would be the stock trade to my strike or a bit above, let it expire worthless and then look to spread my long Aug 195 put or sell it outright.

  • Max Risk is 1.30 premium I paid.
  • If there is a dramtic move to the downside I will make the difference btwn the put that I am long and the one that I am short.



Trade Rationale:  The great thing about this structure is that it makes money in many different scenarios.  As of tomorrow’s open, the trade should be profitable with the stock anywhere between 185 and 230 (a bit of an estimate based on what I think volatility will do), and the most profitable with the stock around 195.  I think it is unlikely that the stock will break 185 on the downside, though if it does, the most I can lose is my $1.40 in premium.  On the upside, I also think AMZN will be hard pressed to break above the highs of this year, around 234.  If the stock makes a huge gap up, that is the only way I can lost most of my $1.40 in premium.

In other words, there are many ways to make money and only a couple ways to lose.  I am betting that there is a good chance that the stock closes tomorrow between 185 and 230, and I’m not paying much for that bet.


Original Post, July 26th, 2012 12:29 pm:

Event:  AMZN will report its Q2 earnings after the bell tonight.  The options market is implying about a 8.7% move vs the average of about 10% over the last 4 qtrs.

Sentiment: Wall Street analysts are generally fairly positive on the name with 30 Buys, 13 Holds and only 1 Sell, with an average 12 month target of ~$260 .  Short intertest sits at only about 2.5% of the float.


Consensus Expectations:

Q2: EPS= .43 ,      Revs= $12.9b  Guidance: $11.9b to $13.3b

Q3: EPS= .50,       Revs= $14.1b

2012: EPS= 2.43, Revs= $63.15b


Technicals from Enis:

AMZN is a messy chart.  It has been stuck in a relatively tight range (for a stock this volatile) for the past year, trading between 170 and 240 (except for a couple brief breaks):



You can see that all of the high volume bars are due to earnings reports, all on big gaps too. A similar scenario is priced in the options for tomorrow’s price action.


On the weekly chart (5 years), you can see the long-term uptrend has remained in tact, even during the wobbles of last fall.  The 190-200 area could be an important area of support to hold that trend as a result:




Implied vol is elevated going into this event and much higher than its histrical average across all months which is in the mid to high 30′s

But the big story is just how inflated the front week options are. Here’s a look at options by month:

You’ll notice the weeklies are off the charts as the market is pricing in a more than 22 dollar move on earnings.


My View: You have heard it here a dozen times, AMZN is a great company, not certain it is an investable stock.  As a consumer I couldn’t be happier with the company and frankly I am big customer, as an investor I am not certain no matter how much they can realistically grow margins above the recent near zero margins, but the stock is never likely to “grow into”certain valuation metrics that are off the charts whether op margins are 1% or 5%.


Stay Tuned for Our Trades.