$AMZN Deals of the Day

by CC April 28, 2016 2:53 pm • Commentary• Trade Ideas

Earlier, Dan previewed Amazon’s Q1 earnings due after the bell. As always with Amazon most metrics you would judge a 20 year old company with go out the window. Also different about a company that’s been around so long and is worth so much is it’s ability to rip traders and investors hearts out with massive swings. Therefore, it’s the perfect candidate for some option overlays and defined risk positions in case this event (like all of them) could be The Big One™.

As Dan mentioned in the preview, the options market is implying about an 8% one day move on the event. That means about $50 in either direction. Those long the stock are probably used to $50 swings and may even be able to stomach that tomorrow if the stock is down by that amount. But a move significantly more than that and it may be hard to sleep into the weekend. So let’s look at a cost effective hedge. And we’re going to keep it simple. The converged 50 and 200 day moving averages is about $580. For those worried about a disaster where that level is violated there really isn’t a ton of significant support below:

vs 100 shares of AMZN (614) Buy the April29th weekly 580 put for 9.50

This simple put purchase protects against a breakdown in the stock and locks in profits at 570.05 (with options implying a possible move 264 or so). It costs about 1.5% of the stock. Like our AAPL hedge from the other day, it’s near the implied move with the idea of protection if the stock out-performs the implied move to the downside (which AAPL did). Yes 1.5% in protection every quarter is a good way to leak a few % points of gains over the course of a year, but when a big selloff does happen on earnings you’re going to be glad you did and it allows you to stay in the stock knowing you can’t lose it all at once and stay in if AMZN has new highs in its near future. And have you seen this chart of the past year?:

[caption id="attachment_63264" align="aligncenter" width="687"]Screen Shot 2016-04-28 at 12.37.21 PM from LiveVol Pro[/caption]


Ok, so what about people that are long or crazy enough to want to go long here? We prefer defined risk profiles using options to play for a move back towards the highs. The previous high is around 695 in December, but that quickly found sellers all the way back to $465 (!) in early February. So similar to the FB bullish trade we detailed yesterday, we’ll target near the highs with a defined risk call butterfly:

in lieu of 100 shares of AMZN (612) Buy the May 625/675/725 call butterfly for 11
  • Buy 1 May 625 call for 21
  • Sell 2 May 675 calls at 10.50 (11 total)
  • Buy 1 May 725 call for 1.00

Rationale – This targets a realistic move towards the previous highs while risking less than 2% of the underlying. If the stock goes down significantly that is a much better prospect than owning shares. If the stock goes back towards the highs, from 636 to 675 this will act like stock on May expiration. Above 575 the profits begin to trail off. But that is the trade-off for defining risk in such a volatile stock.