Amazon.com is at all time highs going into tonight’s earnings report. (Enis’ Preview Here) This is a stock that has been called wildly overvalued, basically since it’s been public and every time people think it’s about to get its comeuppance from a valuation perspective, it just reverses its selloff and starts going higher again. With that in mind, and as widely held a name I thought I’d give some options structures for those that want to keep AMZN as a long term hold but can’t stand the worry about an earnings miss that actually does take a chunk out of the stock. Luckily the options offer some decent ways to do this. Let’s start with one of our favorite hedges which is selling an upside call in order to finance the purchase of a downside put spread.
We’ll start by going to the chart to see if there are any obvious support and resistance areas we can use for strike selection. Let’s start with the downside. The 50 day moving average (purple line) is around 280, with the 200 day (yellow line) 20 dollars below that at 260. In other words, if AMZN wasn’t able to hold 280 on an earnings disaster, the worry would be 260 is in play. And if it was a mild selloff, 280 would be the obvious spot for the stock to try to hold. The upside is pretty tough because the stock is at an all time high. But with that in mind let’s look at three structures that take advantage of those moving average levels:[caption id="attachment_28534" align="aligncenter" width="589"] AMZN 1 yr chart 50 day mva (purlple) & 200 day mva (yellow) from Bloomberg[/caption]
Disaster Protection for AMZN (~303) Longs
Buy the Sept 280/260 put spread, sell the Sept 335 call for around even
- Buy 1 Sept 280 put for 6.30
- Sell 1 Sept 260 put for 2.80
- Sell 1 Sept 335 call at 3.50
This is a nice hedge on a long position if you’re willing to lose a little on a down move but want some protection in case things get bad and the stock is down more that 20 dollars. The good thing about this structure is the upside call you are selling is a little more than 10% to the upside, which gives you a lot of room on an earnings gap to not be called away in your stock. If AMZN went crazy to the upside and was above 335, you’d be called away on your stock but the chances of that happening overnight aren’t massive.
Tighter Protection for AMZN (~303) Longs
Buy the Sept 290/265 put spread, sell the Sept 325 call for around even
- Buy 1 Sept 290 put for 9.20
- Sell 1 Sept 265 put at 3.40
- Sell 1 Sept 320 call at 5.80
This structure gives longs much closer (and slightly wider) protection to the downside for those that can’t stomach any losses more than a few % points and maybe even think that a move back down to support is likely. The trade-off here is that you upside is much tighter as well, with a move only above 325 enough to get called away in your stock. But for those that are thinking the run up to new highs ahead of the announcement is likely a trap, and wouldn’t be surprised to get a little pullback, this is a good structure.
Let’s say you don’t want to give up any upside because your thoughts on the stock are that it either pulls back to support in that 280 range or it’s off to the races on a squeeze higher. Unfortunately this type of structure is impossible to put on for even, but there are some ways to play where it will only cost you a few dollars. So for those that are willing to bet around 1% of the stock price that a move lower to 50 day moving average support is possible/likely and that the 300 level could be a pause moment in the stock, an interesting trade could be in the form of a butterfly.
Healthy Bull Market Pullback Play for AMZN (~303) Longs
Buy the Sept 300/280/260 Put Fly for ~3.50
- Buy 1 Sept 300 Put for 13.50
- Sell 2 Sept 280 puts at 6.40 (12.80 total)
- Buy 1 Sept 260 put for 2.80
What this structure does is offer some protection to the downside within a reasonable range, but allows the AMZN holder to not limit his/her upside. If the stock was to go down on earnings and be anywhere near 280 the options structure will be profitable and take some of the sting out of the shares being down. If the stock was to consolidate in that area, the trade make more and more money as it gets closer to September expiration. What’s also nice is even if the stock broke 280 to the downside and threatened 360, this structure would then turn into a supercharge to your long on a bounce from that level over the next 2 months. With a rally from 260 back to 280 getting more of your money back than just a naked long, and without the worry about having to double down at those levels. (you can only lose another 3.50 on top of your stock losses below 2.60)