Name That Trade – $AMZN Straight Fire

by Dan October 7, 2015 12:58 pm • Commentary

Sadly, (AMZN) is kind of on our “banned list” of stocks. Stocks that generally end up on that list (NFLX is another) share some fairly similar attributes; unusually positive investor sentiment despite valuations that are very irrational and volatile reported results.  Just when you think you have the fundamentals correct the price action proves you very wrong. And often in a big way. Even though I have self imposed bans I still like to keep close tabs on the trade set up into events just in case things look so out of whack I need to break some rules.

While NFLX has gotten its fair share of attention in 2015, up 121%, remember that its $45 billion market cap is dwarfed by AMZN’s $248 billion market cap. And AMZN is up 71% in 2015!  

The story in AMZN this year has been profitability, or the expectation that AMZN will print its largest annual profit in five years with an operating profit more than 10x that of last year.  This remains to be seen, and we wont know until we get Q4 results in January, but guidance for the period expected the last week of October should provide some fireworks.  AMZN has moved on average about 11.5% over the last 4 quarters with its long time average of 9% the day after earnings.  The company has not yet set its reporting date, but it will likely come on October 22nd, the 4th Thursday of the month, which it has done the last 3 Octobers.

The options market is pricing a $54 move in either direction between now and Friday Oct 23rd.  With the stock at $533 the Oct 23rd 532.50 straddle (the call premium + the put premium) is offered at $54, if you bought that now you would need a move above $586.50 or below $478.50 to make money, or about 10%.

On the last three earnings reports (where the stock rallied 10% July 23rd, 14% April 23rd and 14% Jan 29th) the implied move had been walking up as the stock went higher (was 7.5% prior to Jan report, 8.5% prior to April report and 10% prior to the most recent report in July).  This tells me that investors have become increasingly concerned with protecting gains as the stock has moved higher. Which also tells me that the implied move is not likely to come in too much between now and earnings.

The stock chart is quite fascinating, with three consecutive gaps to new highs after earnings followed by months of consolidation:

[caption id="attachment_57474" align="aligncenter" width="600"]AMZN 1yr chart from Bloomberg AMZN 1yr chart from Bloomberg[/caption]

The volatility bands have massively widened during the recent consolidation since earnings in July, but the stock is now butting up against the top end of the range showing very solid relative strength.  Last quarter the stock broke out to a new high and ran into the print, which it could be setting up to do again. To reiterate my initial point, this stock is on my banned list for a reason, it is not for the faint of heart, or the skeptical.  We will be sure to take a closer look prior to earnings.