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.