Update – Amazon Dec Put Fly

by riskreversal November 14, 2016 2:46 pm • Trade Updates

On Nov 9th, the day after the US presidential election it was clear that some big funds got caught flat footed and a massive rotation within equities was upon us. While U.S. stocks have been higher since last Tuesday, mega-cap tech stocks, some of the best performing stocks year to date globally have massively underperformed (Apple, Amazon, Alphabet & Facebook all dow between 5% and 10%). Last Wednesday we looked specifically at AMZN and detailed a trade idea for those that thought the stock could test technical support at $700 in the coming weeks. Here was the trade:

AMZN ($768.40) Buy the December 750/700/650 Put Butterfly for $7.75
  • Buy 1 Dec 750 put for 15.10
  • Sell 2 Dec 700 puts at 4.30 each or 8.60 total
  • Buy 1 Dec 650 put for 1.25

At the time, the trade idea was about 18 dollars out of the money. Now with Amazon 720, the structure is $30 in the money. So let’s check in on it and determine how to best manage what is already a winner but could be a substantially bigger winner. At 720, the Dec fly is worth about 14, so a little less than a double. At the moment it is only about 10-15 deltas, so day to day movement in the stock is probably less important at the moment than implied vol and time. If the stock were to settle into a range here or below to 700 the profit mark to market would improve, as this down move has spiked implied vol a bit:

screen-shot-2016-11-14-at-12-29-49-pm

An in the money butterfly is net short vega meaning when vol goes up it loses money and when vol goes down it gains. What that vol spike had done is pumped the short (x2) 700 puts, and that’s why it’s merely a double at this point.

The other factor at play here is that it doesn’t expire until December. Because of that the best trade management it to be a little patient. If the stock were to hold and go higher towards 750 (the upper strike) it probably would make sense to take the profits at that point and not risk it becoming a loser above 750. On the downside you can be even more patient at the ideal spot for this trade is 700 and below that it’s still profitable for a large range.

This trade makes money on December expiration anywhere between 657.75 and 742.25 and can be worth up to 42.25 at 700. The initial move to here came fast and furious and now it’s a bit of a waiting game to see if it settle in here. We’ll update on the site if we see any scenarios necessitating trade management due to a stock move from here.