With Amazon's (AMZN) latest editions of both the Kindle and Kindle Fire set to be released on October 1st, traders want to know how to best position themselves for the market's reaction to the new devices. To best figure out what to do, let's examine what has transpired when the previous four generations of kindle products were released to consumers.
The first generation of Kindle was released on November 19, 2007 at a retail price of $399. The initial production run sold out in an amazing four hours, and Amazon was not able to keep Kindles in stock until April 2008. Here is a chart of the market's reaction over the next several weeks after the release:
The release date (the 19th) is the 6th day on the chart, with the stock trading in a tight range and closing at $79.18. There was an initial run over the next two weeks, followed by a pullback, and another leg up, with the stock peaking at $97.43 on January 2nd 2008, before retreating to pre-release prices. At peak, the outcome of the Kindle release was a 23% boost in the share price.
The Kindle 2, the second generation was released on February 23, 2009, at an initial retail price of $359, which was soon thereafter reduced to $299.
After the release on February 23 (which is the 3rd day represented on this chart), the stock closed at $61.71. Over the next two months, the stock had a steady climb until peaking at $86.68 on April 24 and leveling off. This represents a 40.5% gain from the closing price on the day of the release.
The third generation of the Kindle was the keyboarded version, including both 3G and Wi-Fi connectivity, which was released on August 27, 2010. The Kindle keyboard with Wi-Fi was priced at $139 and with 3G was priced at $189. Amazon announced on August 25th (2 days earlier) that based on pre-sale numbers, the keyboard was the fastest-selling Kindle to date.
On August 27th (the 6th day on this chart), Amazon closed at $126.64, and over the next several months, peaked at $173.37 on November 10th, a gain of 36.9%
The most recent, and lowest priced, generation of Kindle was released on September 28, 2011. The models were priced at only $79 and $109, depending on whether or not they had ad support. Also released on this date was Amazon's first touchscreen Kindle, which retailed for $139(Wi-Fi) and $189(3G). In addition, the first generation of Kindle Fire, an Android-based tablet with a color touch screen was also released, at a price of $199.
Market reaction was somewhat less than the previous releases. The stock closed at $229.71 on the release date, and peaked at $246.71 on October 16th, a gain of 7.4%.
So, what is the trade? The unifying theme of the previous four releases is a steady climb in value after the release. However, the magnitude of the gains has varied considerably between the releases. So, my trade is to buy a vertical spread of the January options, near the money. This ensures we have plenty of time to make our gains, and with a spread that is near the money, we don't need a very large gain to make our profits. Consider buying the January 260 calls for $18.00 and selling the January 275 calls for $11.75. Our cautiously optimistic trade results in a net cost of $6.25. We give up the upside over $275 in exchange for limiting our potential losses. If Amazon is over $275 at the January expiration (which would be a 5.8% gain from the current price), we make our max profit of $15.00-$6.25 = $8.75. This would be a 140% gain on our investment. I believe the history here warrants a mildly bullish bet on the release of the next Kindle and Fire, and if correct, we will be handsomely rewarded for a very small amount of risk.