AMZN reports earnings after the close on Thursday, Oct 23rd. The long-term uptrend in AMZN actually ended on its January earnings gap lower, closing down 10% that day. The stock gapped lower around 10% on its next two reports in April and July as well. That’s a major shift compared to the prior 4 years, when AMZN would routinely close higher on earnings even after lackluster earnings reports.
The 5 year weekly chart shows the break in trend:
We have not been positive on AMZN for several years (I like to call it the best not-for-profit company in the world). We have also stayed away from trading the stock for the most part in that period given its large earnings gaps and big swings.
Most recently, back in early September when the stock was near $340, we detailed our bearish view in a NTT post:
The stock did a fairly nice job filling in most of the earnings gap, but with Friday’s news of their longtime CFO stepping down next year, this morning’s price cut on the Fire Phone and the general sentiment shift among investors from half full to half empty, we think this could provide a good near term entry for a defined risk bearish trade targeting a move back to $300.
As a rule we don’t like to press shorts on a down day, much like how I wanted to give TSLA a little room to breathe after Friday’s sharp decline, so we are going to keep and eye on this one as we would likely look to enter long put spreads in Nov playing for the fourth consecutive sharp decline on an earnings event. Stay tuned.
We didn’t get a chance to enter a position on AMZN, and it did indeed move back below $300 before bouncing the past 2 days.
At this point, with earnings next week and the stock at the low end of its 6 month range, we don’t plan on entering a new position in the stock. However, for those who agree with our fundamental view that AMZN is overvalued, and want to play for a break to new lows, here are a couple structures that are good risk/reward (scroll to the end for our discussion of how we chose each structure):
1)
Hypothetical Trade: AMZN ($305) Buy the Nov 300/260/220 Put Butterfly for $7.40
-Buy 1 Nov 300 Put for 12.80
-Sell 2 Nov 260 Puts at 3.15 each or 6.30 total
-Buy 1 Nov 220 Put for 0.90
Break-even on Nov Expiration:
Profits: gains of up to 32.60 between 227.40 and 292.60, max gain of 32.60 at 260
Losses: up to 7.40 between 220 and 227.40 and between 292.60 and 300, with max loss of 7.40 below 220 and above 300
Rationale: This put butterfly targets the $225 – $285 range in AMZN, which coincides with the area where AMZN traded prior to its breakout above $300:
[caption id="attachment_46961" align="aligncenter" width="600" class=" "]
AMZN weekly chart, courtesy of Bloomberg[/caption]
2)
Hypothetical Trade: AMZN ($305) Buy the Dec 300/250/200 Put Butterfly for $9.50
-Buy 1 Dec 300 Put for 15.10
-Sell 2 Dec 250 Puts at 3.20 each or 6.40 total
-Buy 1 Dec 200 Put for 0.80
Break-even on Dec Expiration:
Profits: gains of up to 40.50 between 209.50 and 290.50, max gain of 40.50 at 250
Losses: up to 9.50 between 200 and 209.50 and between 290.50 and 300, with max loss of 9.50 below 200 and above 300
Rationale: This put butterfly targets the $210 – $290 range in AMZN, which is similar to the November put fly. However, why did we choose December wider?
Both trades will act similarly, with a couple caveats. The November trade is a more aggressive structure, with more risk but more reward in the short-term. In other words, the Nov put fly will make more money on a 10-15% move lower in AMZN on earnings, but it will lose most of its premium on a 10-15% move higher, since it has less time until expiration. On the other hand, the December trade will appreciate less on a move lower, since it will take more time for the short 250 strike puts to decay, but the trade will hold its value better if AMZN rallies on earnings and provides a wider cushion on the downside if things get ugly. That’s part of the reason why we chose a wider fly on the December trade, to give it more appreciation potential on a move lower.
We are not executing either trade for ourselves, but wanted to lay out the ideas for those interested, and discuss the differing merits of the near-term, tighter fly vs. the farther out, wider fly.