$AMZN Q3 Earnings Cheat Sheet

by Enis October 23, 2014 10:20 am • Commentary

Event:  AMZN reports its Q3 earnings tonight after the close.  The options market is implying about a 7.5% one day move, which is below the 4 qtr avg of about 10% and in line with 8 qtr avg of about 7.75%.

Sentiment:  Wall Street analysts are bullish on the stock, with 31 Buys, 18 Holds and 2 Sells, and an average 12 month price target of $390.  That is despite AMZN’s year-to-date decline of 21.5%.  The weakness has been entirely due to post-earnings moves, as AMZN has declined 10% on each of the past 3 reports (January, April, and July).  Short interest is in the same spot as 6 months ago, around 2% of the float.

Options Open Interest:  Calls and puts have nearly the same open interest, with a slight tilt to puts by a ratio of 1.075 to 1, and a similar slight tilt to puts over calls in the options volume over the past month.  The 300 put line has the most open interest in Nov expiration, at over 5k.  The Jan15 300 put also has over 6k of open interest, and on the upside, the Jan15 350 call has nearly 7k in open interest.

Price Action / Technicals:  AMZN had a bad start to the year, falling from $400 to $300 in the months between late January and late April, including the two large earnings gaps lower:

AMZN daily chart, courtesy of Bloomberg
AMZN daily chart, courtesy of Bloomberg

The July earnings gap has not been filled either, with AMZN struggling to catch a bid even when the Nasdaq rallied to new highs in September.

The $340 level is the key resistance level on the upside, while $285 is the low from May.  It’s noteworthy that the options market consensus is not expecting a break of either level, as the implied move on earnings is about $23.50, which would put AMZN around $337 on the upside or $290 on the downside.

Volatility:  30 day implied volatility in AMZN is around 40, which is near the level prior to earnings in the past 5 quarters:

30 day implied volatility in AMZN, courtesy of Bloomberg
30 day implied volatility in AMZN, courtesy of Bloomberg

As I mentioned in the technicals, the implied move of 7.5% seems fair given support and resistance in the stock.  AMZN realized volatility outside of its large earnings moves has actually been quite low in 2014, indicating that market participants have generally been interested in adding or selling positions mainly on the day after the earnings report.

My View:  We have been clear about our skepticism regarding AMZN’s fundamental valuation, most recently in a Name That Trade post last week.  I summed up the post as follows:

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):

Since implied volatility is elevated, it’s difficult to simply buy outright puts in AMZN, so those two structures are a better risk/reward way of getting downside exposure for those interested.  For those who want to play the upside, targeting the $340 resistance level with an options trade seems the natural spot on the upside.