Earlier we highlighted the implied move in the options market (along with a few other fun facts) for Amazon.com’s (AMZN) Q3 results due out after the close:
The options market is predicting about a 7% move in either direction for AMZN (4qtr avg one day post earnings move about 4%), or about $27 billion in market cap in either direction.
Analyst ratings… there are also 44 Buy ratings, 5 Holds and no Sells, average 12 month price target of $943, or 13.5% higher than current levels.
AMZN investors have been conditioned to not value the stock on a P/E basis, but to focus on revenue growth that meaningfully accelerated in 2016 to expected 28% from 20% the prior two years, with EBITDA growth of 44% aided by the growth and margin profile of AWS and the creeping margins on retail.
investors (might) shoot first and ask questions later with the stock up 72% from its 52 week lows made in February. The stock is sitting on the uptrend that has been in place from those lows, with the next real technical support level at $750, down about 9%:
AMZN’s 70% gains from its February lows is truly astounding, but the 5 year chart might give you vertigo. Obviously there is NO overhead technical resistance, with very near term support at $750 with an air-pocket below down to $700:
So what’s the trade? It’s not really in our DNA to play a stock like this for continued gains into a potentially volatile event like earnings. But where we may be able to add value is offering a protective overlay for nervous longs, long stock alternatives for those looking to book some gains but replicate some prior long exposure and defined risk contrarian short bet:
against 100 existing long shares of AMZN ($821) Sell 1 Nov 875 call, buy Nov 775 / 700 Put Spread for even money
- Sell to open 1 Nov 850 call at $11
- Buy to open 1 Nov 800 put for $12.75
- Sell to open 1 Nov 720 put at $1.75
Break-Even on Nov Expiration:
Profits: of stock up to $875 (just outside the implied move and up about 7% from current levels), stock called away above that level, but can always buy back the short call to keep the long stock position in place, but profits capped up 7%.
Losses: of stock down to $775, down 5%, protection between $775 and $700, down 15%, no protection below $700, but have mitigated 10% of losses on a stock correction down towards the 200 day moving average.
If I were to express a brand new bullish view into tonight’s print I would risk what I am willing to lose as the event is binary. We are not huge fans of long premium directional bets into events like earnings as you need to get a lot of things right to merely break-even, first and foremost direction, and then magnitude of the move.
With no overhead resistance, I might merely target the implied move of 7%, or $50 higher:
in lieu of 100 shares long AMZN ($821), buy Oct28th 820 / 870 / 920 call butterfly for $14
- Buy to open 1 Oc28th 820 call for 26
- Sell to open 2 Oct28th 870 calls at 6.50 each or 13 total
- Buy to open 1 Oct28th 920 calls for 1
Break-Even on Oct28th close (tomo):
Profits: up to 36 between 834 and 906, with max gain of 34 (or 4%) at 870 (up 6%), profits trail off between 870 and 906
Losses: up to 14 between 820 & 834 and between 906 and 920. max loss of 14 below 820 or above 920
Rationale – On both of these trades we use the implied move as a target. In the case of the stock alternative we’re able to use it as a target for a fly, with the 2x sale of the call able to lower premium at risk to just 14 vs the potential losses of long stock being much more. In the case of the hedge, we set the short call strike just above the implied move, with the idea that a move higher in line with the implied move is the perfect situation where the hedge can be taken off or let expire with no harm no foul.
Defined Risk Bearish:
in lieu of 100 shares short AMZN ($821), buy Oct28th 800 / 750 put spread for $13
- Buy to open 1 Oct28th 800 put for 14.50
- Sell to open 1 Oct28th 750 put at 1.50
Break-Even on Oct28th close (tomo):
Profits: up to 37 between 787 and 750, with max gain of 37 at 750 (down 8.6%)
Losses: up to 13 between 800 & 787 and max loss of 13 at 800 or higher.
Rationale: Just like the caveat with the stock alternative, the same proves here, this is nothing other than a direction punt, with worse odds than a coin flip, but much prefer a defined risk contrarian short in a stock like AMZN into an event than a naked short. Risking what you are willing to lose with a greater likelihood of a loss than a gain.