Earlier I previewed tonight’s Q2 results due after the close for Amazon (AMZN). Given the fact that the stock is within 1% of its all time highs, and the options market is implying a whopping 7% one day move tomorrow in either direction, I wanted to detail a few options strategies that may make sense given one’s existing positioning or short term directional inclination.
And just to put some context on the expected movement, with AMZN sporting a market cap of $350 billion, that’s nearly $25 billion in either direction, equal to 57% of Target’s (TGT) market cap. Let’s really drive the point home, AMZN’s market cap is great than Walmart (WMT), TGT & Costco (COST) combined, despite those three companies having 6x AMZN’s $107 billion sales in 2015. Regular readers know that I am not much help when it comes to trading AMZN, I have been way too skeptical for such mundane reasons as profitability (or lack thereof on 90% of their sales).
Ok… to the trade ideas:
Hedge: against 100 shares of AMZN ($745) Buy July29th weekly 800 /700 Collar for $1
- Sell to open 1 July 29th weekly 800 call at $5
- Buy to open 1 July 29th weekly 700 put for $6
Rationale – Given FB’s gap and crap, I think it is safe to say that if AMZN were to gap higher on a better than expected report, the stock could find resistance at the prior highs. If the stock were to miss and guide lower, the stock is going straight back to $700 and it could make sense to have some disaster protection below. If the stock is between 700 and 800 you would lose the $1 premium paid for the collar, and have gains or losses of the stock above or below current levels with gains capped at 799 (call strike less 1 premium paid for the collar) and losses down to 699 (the put strike less the 1 premium paid for the collar).
Bullish: A breakout of at least 5% but with defined risk.
Stock Alternative: in Lieu of 100 shares of AMZN ($745) Buy July29th weekly 750 / 800 / 850 Call Butterfly for $14
- Buy to open 1 July 29th weekly 750 call for $23
- Sell to open 2 July 29th weekly 800 calls at $5 each or $10 total
- Buy to open 1 July 29th weekly 850 call for $1
Rationale – this trade breaks-even at $764 on tomorrow’s close, up about 2.7% from the current levels, with a max gain of $36 at $800, which is essentially the implied move to the upside. The payout trails off between $800 and $836, with losses of up to $14 between $750 and $764 & between $836 and $850. It has a max loss of $14 below $750 or above $850. This trade strategy intends to mitigate post earnings vol crush while offering fairly near the money participation above the recent all time highs.
Bearish: Targeting a move back to $700 in line with the implied move.
In lieu of 100 Shares short of AMZN at $745, Buy July29th weekly 725 / 700 / 675 put Butterfly for $5
- Buy to open 1 July 29th weekly 725 put for $15.50
- Sell to open 2 July 29th weekly 700 put at $6 each or $12 total
- Buy to open 1 July 29th weekly 675 put for $1.50
Rationale – This trade risks less than 1% of the stock price, breaks-even at 720, offers gains of up to 20 between 720 and 680, losses of up to 5 between 720 and 725 & between 680 and 675 with max gain of 20 at 700 with max loss of 5 below 675 and above 725.
I’LL OFFER OUR USUAL DISCLAIMER FOR LONG PREMIUM DIRECTIONAL TRADES INTO EVENTS LIKE EARNINGS. YOU NEED TO GET A LOT OF THINGS RIGHT TO JUST BREAK-EVEN, NOTHING MORE IMPORTANT THAN DIRECTION AND THE MAGNITUDE OF THE MOVE.