On Amazon (AMZN) and Implied Moves

by Dan April 26, 2018 12:55 pm • Trade Ideas

Amazon (AMZN) reports Q1 earnings tonight after the close. The options market is implying about an $85 move in either direction tomorrow, or about 5.5%. We get asked all the time how we calculate the implied movement for an event like earnings, and frankly, it is pretty easy,but it wasn’t always, before weekly options. So here it is, take the at the money straddle, the call premium + the put premium and divide by the strike price. In the case of AMZN, the stock is trading at $1500 and the April 27th weekly (tomorrow expiration) straddle is offered at $85, if you bought that and thus the implied movement for tonight’s earnings you would need a rally above $1585 or a decline below $1415 by tomorrow’s close to just break-even.

For those willing to make a defined risk directional bet into the print, one could merely buy the at the money put or call only having to meet half the implied move to break-even.

BUT as we often discuss in our trade idea posts, for long premium directional bets into an event like earnings, you need to get a lot of things right to just break-even, first and foremost the direction of the move, then obviously the magnitude of the move and timing. The first two are fairly straightforward, but the timing is one that people have a hard time with, especially over the last few years as weekly options are listed on most large-cap stocks. The challenge with weeklies for events is that they have the least amount of time value, but nearly all of the extrinsic premium is there for the event. You get the direction wrong on such a short time horizon and you will have a near-total loser, a very binary event.

But lets say you are long calls in stock that reports earnings with an expirey a month out, you have the potential to get the initial move wrong, both direction and magnitude, but might end up getting bailed out if the stock were to reverse over days or weeks. This is one reason why we generally don’t trade weeklies into events unless we had very strong conviction about the outcome.

So let’s look at AMZN, with the stock at 1500 into tonight’s print. Lets say I am bullish, possibly already long, and I think the stock is going to outperform the implied move of 5.5% and I want to lever up my long position or make an outright bullish bet, but do so by defining my risk, I might consider buying the April 27th weekly 1500 call for $42. I am adding $42 of risk, that the stock will increase tomorrow by $42 as the calls expire on tomorrow’s close. If the stock is below $1500 I lose the $42, seems kind of Binary.