Since initiating the Nov 230/210 Put Spread last Friday, AMZN has dropped 5%, and my spread appreciated by more than 50% (see updates below). I took the profits with the intention of rolling them to a trade that offers a better risk reward. As I also said below, AMZN has been a difficult stock to get right on the short side, and given the generally horrible sentiment surrounding tech stocks in the past week it seems entirely possible that this would be the one stock to give shorts the ol’ FU.
So now I want to choose a structure that has a lower premium outlay, a lower probability of success. This may sound dumb some people, but hear me out for a second, I book some profits on the initial trade as I got the direction right, now I want to remain cautiously bearish and look to a trade that offers a lower probability, but lower premium risk, and higher reward if I get the direction and the magnitude of the move right. One of the few ways I know to do this with defined risk would be with a ButterFly. These structures can be difficult to manage as they have 4 legs and not entirely easy to trade out of if you are wrong on direction.
Much like AAPL, AMZN is down about 13% in the last month since making new all time highs last month, which makes it particularly hard to press the short into what is most likely to be a volatile earnings announcement.
I am going to risk the profits from last weeks trade to make a defined risk directional bet that offers better than a 10 to payout in a week if the stock is down inline with the implied earnings move, keys there are inline with the implied earnings move and down, if I get those wrong I will be lucky to recoup any of the the premium I paid.
New Trade: AMZN ($228) Bought Nov 2nd Weekly 210/200/190 Put Fly for .90
-Bought 1 Nov 2nd Wkly 210 Put for 4.00
-Sold 2 Nov 2nd Wkly 200 Puts at 2.05 each for a total of 4.10
-Bought 1 Nov 2nd Wkly 190 Put for 1.00
Break-Even on Nov 2nd Wkly Expiration (next Friday):
-Profits btwn 209.10 and 200 make up to 9.10, payout trails off btwn 200 and 190, max gain of 9.10 at 200.
-Losses btwn of up to .90 btwn 209.10 and 210, and btwn 190.90 and 190, max loss of .90 above 210 and below 190.
I bid inside the markets on these lines and was able to get a fill at my price. There is enough paper trading in these lines that you don’t need to do bid to ask to get filled.
Trade Rationale: Technically the chart is broken, below the uptrend line since the 2011 lows, quickly approaching a key support level of ~220, but I fear a technical break on bad fundamental news will cause a investors to quickly take profits in a stock that is still up 32% on the year. I AM RISKING WHAT I AM WILLING TO LOSE, BUT I LIKE THE RISK/REWARD OF THE TRADE GIVEN MY PROFITS FROM THE PUT SPREAD. The stock is a bit oversold near term, so any decent news and we prob get a bit of a short squeeze, so I want to risk a little to make a lot.[caption id="attachment_18636" align="aligncenter" width="490" caption="amzn 1YR CHART FROM BLLOMBERG"][/caption]
Bloomberg Preview: By Brian Welcher and Beth Mellor
Oct. 25 (Bloomberg) — Amazon reports 3Q post-mkt today.
• 3Q EPS (GAAP): Loss of 8c (range loss of 31c-EPS 20c)
• 3Q rev.: $13.92b (range $13.58b-$14.28b)
• 3Q operating loss $42m (range loss $227m-profit $112m)
• 3Q ebitda margin: 4.6%
• 3Q operating margin: -0.3%
• 4Q EPS (GAAP): 53c (range loss 16c-EPS 94c)
• 4Q sales: $22.82b (range $21.61b-$24.03b)
• 4Q operating profit: $354.1m
• 4Q ebitda margin: 4.65%
• 4Q operating margin: 1.6%
WHAT TO WATCH:
• AMZN gives sales, operating income guidance; outlook will be “biggest wildcard” of results due to macroeconomic uncertainty, new Kindle Fire introductions, fulfillment center investment cycle, and challenges facing media unit: Citi (buy)
• ChannelAdvisor Sept. data suggests AMZN 3Q rev. will be in-line; historical trends suggest 4Q rev. guidance may be 3%-4% below street: Piper
• Thin margins may persist as Kindle experiences increasing competition and lower ebook pricing following recent settlement with publishers is also negative for margins: Cantor (buy)
• Watch commentary on impact of new sales taxes in California, Texas: Citi
• Also watch for any color on acquisition strategy; Oct. 22, Sunday Telegraph reported Amazon considered bidding for Asos
• Implied 1 day move 9.2%; shares up 5 of last 8 days after
• AMZN has 31 buys, 13 holds, 2 sells, $274.13
• AMZN up 32% YTD vs S&P 500’s 12% gain
• AMZN will report post-mkt
• Call 5pm 719-325-2304
2nd Trade Update Oct 25th, 2012 at 1:04pm: I am closing the second half of this Nov regular Put Spread and I am now going to look to roll strikes and expirations, possibly to weeklies, and risk a portion of the profits that I have made since last Friday.
Action: AMZN ($227.60) Sold to Close 2nd half Nov 230/210 Put Spread at 7.70 for a $2.85 gain. AVG gain on entire position was 2.75
Trade Update Oct 25th, 2012: Since initiating this bearish position last Friday afternoon, AMZN is down about 5% into tonight’s Q3 print. To state the obvious, AMZN has been a tough nut to crack on the short for the last year, regardless of how paltry their reported operating margins have been. With profits more than 50% of what I paid for the Put Spread, I am going to book some gains and take another look this afternoon, possibly looking to use my profits to roll down my position and only risk what I have already made.
Action: AMZN ($228) Sold to Close half Nov 230/210 Put Spread at 7.50 for a $2.65 gain.
Original Post Oct. 19th, 2012: New Trade: Amazon (AMZN) – With Investors Fleeing From Once High-Fliers, AMZN Looks Vulnerable
Here’s a preview of what I’ll be talking about on Options Action tonight:
Event: AMZN reports their Q3 Thursday Oct 24th after the close. The options market is implying about an 8.5% move (the atm straddle is offered at ~$21, stock ref ~$241), vs the 4 qtr avg move of about 11% and the 8 qtr avg move of about 8.2%.
Sentiment: Wall Street remains fairly positive on the stock with 31 Buys, 13 Holds and only 3 sells, with an avg 12 month price target of ~$273. Short interest sits below 2.5% of the float.
Fundamentals: We’ve posted before about how we think AMZN is a great company, but not a great stock. It’s just far too rich for the earnings that you get. Stellar sales growth, sure. But when is that going to translate into earnings. Bulls sound like a broken record when they say that huge sales growth will eventually translate into earnings. AMZN has an impeccable franchise, but competitive pressures are only increasing (see AAPL, GOOG on tablets, WMT, TGT on same day delivery).
Focusing on valuation here makes little sense. This is a sentiment story, plain and simple. Timing becomes crucial, and we think the fall mutual fund rebalancing season might finally be the catalyst to send the stock lower.
Price Action/Technicals: AMZN has been a massive out-performer this year up more than double that of the Nasdaq (+38.5% vs .15.5%). The stock is down about 9% from the all time high made in Sept, but up about 43% from the 52 week low made in late December 2011.
One of the reasons why we are getting involved with AMZN here is that, as we’ve mentioned several times this month, it’s that time of year where mutual funds start to sell their big winners as they rebalance their portfolios. AMZN is clearly a big winner year-to-date, and based on the price action in its large technology brethren, and sky high valuation, it might finally be time that they unload their shares.
Volatility: October26 weekly vol is in the high 70’s, with only one day between the company’s earnings release and expiration. The ATM straddle in those weeklies is pricing around a 21 dollar move. November vol is in the mid 40’s, much lower than the Oct weeklies but pretty high compared to where it settles in following earnings. Expect to see Nov vol collapse to the low 30’s following the report. Here’s a look at IV and HV historically:
MY VIEW: AMZN has had their share of issues this year as they demonstrate the supposed leverage in their business model. While Operating Margins remain at dismally low levels, investors and the street continue to be buyers on HOPE. This Q4 could be the make of break of the story, at least for the time being in a maket environment that has not been kind to big winners of late (see AAPL, GOOG, PCLN, CMG, SBUX). A couple other issues that concern me is the price action in stocks like COST since reporting better results last week, the price action in stocks like DLTR since pre-announcing worse than expected results, and the price match guarantees from the likes of TGT. OH, I FORGOT TO MENTION THAT NEXT WEEK AAPL IS ABOUT TO INTRODUCE THE KINDLE FIRE “EXTINGUISHER” IN THE FORM OF A 7′ INCH iPAD.
TRADE: AMZN ($240.40) Bought Nov 230/210 Put Spread for 4.85
-Bought 1 Nov 230 Put for 7.62
-Sold 1 Nov 210 Put at 2.77
Break-Even on Nov Expiration:
-Profits btwn 225.15 and 210, make up to 15.15, with max gain of 15.15 at 210 or below.
-Losses up to 4.85 btwn and 225.15 and 230 , max loss of 4.85 above 230.