Tonight after the bell Amazon (AMZN) will report their Q3 earnings, the options market is implying about a 6.5% one day move tomorrow, which is rich to the average of about 5% over the last four quarters. With the stock at $1745 the Oct 26th 1745 straddle is offered at about $112, if you bought that, and thus the implied move you would need a rally above $1857, or a decline below $1633 to make money. What’s interesting about the implied move is that to the upside it is at the breakdown level from earlier in the month, and to the downside very near yesterday’s low which appears to be technical support dating back to late June:
Despite AMZN’s 14% decline from its all-time made in early September at 2050, the stock is still up 50% on the year sporting the second largest market cap at $858 billion, obviously behind Apple (AAPL) at just over $1 trillion.
Top-ranked Internet analyst Mark Mahaney from RBC, who rates AMZN a Buy with a $2100 target expects:
For the September quarter, we expect $56.0B in Revenue, $2.02B in GAAP Operating Income and $3.04 in GAAP EPS. Note that our Revenue estimate is a tad below consensus and near the middle of management’s guidance, and our Operating Income estimate is just below consensus. Our GAAP EPS estimate of $3.04 is also just a notch below consensus $3.10.
And identifies the following keys to the quarter:
1) Gross margin trends: Consistent and material Y/ Y GM expansion has been one of the most important fundamental factors for the stock’s outperformance over the past several years, in our view. We estimate Q3 gross margin of 41%, up 350bps Y/Y; 2) Overall Operating margin trends: We are modeling 3.6% GAAP operating margin in Q3, up 280 bps Y/Y, thanks in large part to the increased contribution of high- margin AWS and Advertising revenue; 3) Key AWS Results: For Q3, we are looking for AWS Revenue of $6.6B, growing 45% Y/Y, and AWS GAAP Operating Profit of $1.8B (a 28% margin); 4) Key North America Retail Results: We are looking for NA Retail Revenue of $33.6B, growing 32% Y/Y or 21% ex-WFM, and NA Retail GAAP Operating Profit of $1.1B (a 3.2% margin); & 5) Key International Retail Results: We are looking for International Retail Revenue of $15.8B, growing 16% Y/Y ex-FX, and an International Retail Segment Loss of $0.9 billion
The stock’s recent decline obviously lowers expectations, but I suspect a miss on operating margins would be the thing to cause the stock to re-test yesterday’s lows on its way back to $1500, very near the stock’s Q1 earnings gap in late April.
Also, given the stock’s decline, this is a very hard trade set-up, as it would take a meaningful miss on profitability metrics, not forward guidance that would take the stock down as investors have gotten used to seeing conservative outlooks from the company.
So what’s the trade:
If I were inclined to play for a bounce on a pristine quarter with lowered expectations, I might target a move back above 1800 and possibly towards $2000 prior to the holiday season:
BullIsh Trade Idea: AMZN ($1745) Buy Nov 1800- 2000 call spread for $50
-Buy to open 1 Nov 1800 call for $62
-Sell to open 1 Nov 2000 call at $12
Break-even on Nov expiration:
Profits of up to $150 between 1850 and 2000 with max gain of 150 above 2000
Losses of up to 50 between 1800 and 1850 with max loss of 50 below 1800
Rationale: this trade breaks even up near the implied move. The options market is saying there is only a 33% chance of that on Nov expiration, which is not great when you consider the potential for a sharp move tomorrow. Get the direction wrong and the trade is likely a big loser.
As always we look to offer defined risk ways to play events, but in a high priced stock like AMZN with high implied vol into an event it can be very hard. This trade idea risks a little less than 3% to possibly make 8.5% if the stock is up 14% in a month.
On the flipside, if you are convicted that the company misses and guides lower, than I suspect it will not be a one-day event and the stock will be back on its way to $1550 or possibly $1500 over the next few weeks. In this scenario, I might consider a Nov put spread.
Bearish Trade Idea: AMZN ($1745) Buy Nov 1700 – 1500 Put Spread for $45
-Buy to open 1 Nov 1700 put for $57
-Sell to open 1 Nov 1500 put at $12
Break-even on Nov expiration:
Profits of up to $155 between 1655 and 1500, max gain of 155 at 1500 or lower.
Losses of up to $45 between 1655 and 1700 with max loss of 45 at 1700 or higher
Rationale: risking 1 to maybe make 3 if the stock is back at 1500 in 4 weeks.