On April 12, 2012 I introduced investors to an option strategy known as the reverse iron condor and why this strategy should be applied for trading Amazon's (AMZN) earnings. I am generally a bread and butter option trader and mainly trade calls, puts and vertical spreads. Occasionally, I enjoy using non-directional strategies to trade a company's upcoming earnings report. For Amazon's upcoming earnings report on July 25, 2012 I am going to be using the same reasons for applying the reverse iron condor as I did on Amazon's last earning release and for more information please click here.
The reverse iron condor may sound complex, but for option traders who are used to trading spreads the reverse iron condor is the purchase of a vertical call spread and a vertical put spread. I prefer this strategy when trading Amazon's earnings, since Amazon has a tendency to make big moves during earnings. In my opinion a non-directional strategy can give investors greater probability and odds if employed correctly rather than just buying a call or put.
Amazon last reported earnings on April 26, 2012 that were better than expected and Amazon's shares gained over $30 in a day that produced a home-run for traders using the reverse iron condor. When trading a company's earnings using non-directional strategies (straddle, strangle and reverse iron condor) I am generally not concerned on whether a company's earnings turn out to be positive or negative, but rather if the stock is volatile enough to the upside or downside to profit from.
Besides the better or worse than expected numbers that can cause shares of Amazon to move significantly to the upside or downside, there are also other factors that traders should consider. Sales tax has always been a competitive advantage that Amazon has had over traditional brick and mortar stores since Amazon has been able to get away from not collecting sales tax. Amazon now collects sales tax in several states, but has shifted their focus to developing smaller distributing areas inside of cities and time will tell if this strategy will pay off.
Amazon has also been accused of selling items below cost that competitors have always complained about. Employees and management of Amazon's competitors may think this is unfair competition, but in my opinion this is just another form of competition that Amazon has in their arsenal. Besides the Kindle Fire, which Amazon sells at a break even cost for the company (depending on the cost for components) there have been rumors that Amazon may have plans for a smartphone. If Amazon goes ahead with their smartphone plans there will obviously be a number of hurdles, but Amazon is one of the few competitors that may not care if they make a profit on smartphones as long as Amazon can bring in new consumers.
Since Amazon's last earnings report the stock has been stuck in a range between $210-$230 and earnings might decide if Amazon can make the next leg higher or head lower. Amazon reports earnings on July 26, 2012 and here is how to trade Amazon using the reverse iron condor.
Trade: Reverse Iron Condor
Buy (1) August 220 call= $8.40
Sell (1) August 225 call= $6.20
Buy (1) August 210 put= $7.60
Sell (1) August 205 put= $5.65
Total Cost= $415 Vertical Call + Vertical Put
(8.40 - 6.20 = 2.20) (7.60 - 5.65 = 1.95) 2.20 + 1.95= 4.15 (4.15 x 100 = $415)
Days Till Expiration = 32
Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid
Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid
For the reverse iron condor to be successful for Amazon's earnings release shares of Amazon will need to be above $224.15 or below $205.85 for traders to make money. Investors may choose to also look at straddles and strangles, but these can have higher rewards and cost more. At the time I am writing this article shares of Amazon are trading around the $215 level and traders are betting that Amazon will make around a nine dollar move before or after earnings. For traders who are unfamiliar with the reverse iron condor, I encourage you to please practice this strategy before attempting and this idea is a trade and not an investment.
Thank you for reading and good luck.
Disclosure: Will be considering the reverse iron condor before earnings and will post on this article under comments when I do.