Amazon Earnings: A Blazing Kindle Fire Or Flameout?

| About:, Inc. (AMZN)
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By: John J. Critchley, Jr. (NASDAQ:AMZN) is set to report earnings after the bell on Tuesday. The consensus estimate of analysts covering AMZN is $0.19, and the high and low estimates are $0.43 and $0.03, respectively.

Currently, 40 analysts have a rating on AMZN with seven maintaining buy ratings, 18 outperform and 15 holds. It is interesting to note that there is not even one analyst with a sell rating on the underlying despite an astronomically high P/E of over 100. Even Apple (NASDAQ:AAPL), the uber stock of all time, has one analyst with a sell rating on the tech darling.

One possible rationale for such community love by analysts is the price movement of AMZN has left some in the investment arena to wonder if the online retailing juggernaut's sell-off from highs of $246.71 hit in mid October of last year is overdone. Down over 23% from its apex hit last year, many smell a bargain.

The key question for the earnings release may well be what the sales data are for Kindle Fire. There is increasing sentiment that the Kindle Fire may have caught fire in the growing tablet marketplace despite tepid technology and consumer retail reviews. Jordan Rohan, a research analyst with Stifel Nicolas, has raised the estimate of Kindle Fire sales to 6 million from an earlier estimate of 5 million.

Options Plays

Trade idea No. 1 - A Long Options Premium Play

Confused on what to do with the earnings? Long or short? How about playing both ways?

Even with AMZN trading nearly 23% off its all time highs, the implied volatility of the options is quite a distance from its 52-week highs. The 30-day implied volatility is trading around 50.04%, significantly less from the 52-week implied volatility high of 62.05% hit in October of last year.

Let's take advantage of these reasonable implied volatilities to initiate a position that takes advantage of any post-earnings move in the underlying. If you believe this scenario may play out, let's buy a straddle.

(This is not a specific trade recommendation, but a trade analysis.)

The play:

a) Buy Feb 3 2012 weekly 190 straddle for $18.40. The implied volatility of this straddle is seemingly quite high at approximately 95% IV (implied volatility). This IV reading is, however, misleading because the most important determinant of an options real value as it gets closer to expiration is the premium only, not the actual IV percent reading. The premium over parity (POP) number of $18.40 is what is really paramount.

Net debit: $18.40.

Why the 190 line? You are buying the at-the-money straddle for $18.40. The breakevens for this straddle in the underlying are $208.40 and $171.60, respectively. These breakeven points represent a 9.2% move in the underlying. This percentage move does not appear to be unreasonable especially when you factor in that you are buying "event premium" and considering some of the other moves post-earnings in the technology sector as of late. ( NFLX +22%, AAPL + 7%, SNDK - 12% etc.)

Risk: The earnings report does not cause the expected movement in the underlying. Be forewarned. You may lose the entire premium. This play is for speculative monies only.

Trade idea #2 - A Long Condor Play

If the premium in the straddle seems exorbitant and outside of your comfort zone, there is another way to play the expected move in the underlying. Buy a condor. A condor is a four legged spread with limited risk and limited reward. If you want to play the upside, buy a call condor and if you believe a downside move is in the works, buy a put condor.

(This is not a specific trade recommendation, but a trade analysis.)

The upside play:

For an upside play, let's buy the Feb 3 2012 weekly 200/205/210/215 call condor for $ .85.

The trade is:

A) Long 200 call

B) Short 205 call

C) Short 210 call

D) Long 215 call

Net debit: $.85

Why these strikes? The sweet spot for this trade is anywhere between $ 205 and $210 by this Friday's expiration. If the underlying closes anywhere between these strikes, you will receive the maximum payout of $5.00 per contract. This up move represents a 7.02% move in the underlying and roughly coincides with the markets expectations of the post earnings move in AMZN.

Max Profit:

  • Max Profit = Strike Price of Lower Strike Short Call (205) - Strike Price of Lower Strike Long Call (200) - Net Premium Paid. $5 - $.85 = $4.15
  • Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Calls (between 205 & 210)

Max Loss:

  • Max Loss = Net Premium Paid.
  • Max Loss Occurs When Underlying <= Strike Price of Lower Strike Long Call (200) or Price of Underlying >= Strike Price of Higher Strike Long Call (215). To translate: When Underlying is below $200 or above $215.


  • Upper Breakeven Point = Strike Price of Highest Strike Long Call (215) - Net Premium Paid. $210- $.85 = $214.15
  • Lower Breakeven Point = Strike Price of Lowest Strike Long Call (200) + Net Premium Paid. $200 +$.85 = $200.85

The downside play:

The same principle of the condor works on the downside if you utilize puts contracts. If you are bearish on AMZN earnings, you can substitute the call condor for a put condor. One may consider trading the 180/175/170/165 put condor. The risk of this trade is the debit $.73; reaps a $4.27 profit if the underlying is between $175 & $170 by expiration and has breakeven points of $179.27 & $170.73. If AMZN is above $180 or below $165, you will lose the entire premium.

Notes: Prices quoted were the prices at time of submission and do not reflect current market prices.

Disclaimer: We are not liable for any trading decisions made by any reader. No advice is given or implied. The information offered in this article is for demonstration purposes only and should not to be either construed as an offer or considered to be a recommendation to buy or sell any options.

Your use of this information is entirely at your own risk. It is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with a professional broker, or financial planner, and make your own independent decisions regarding any trades mentioned herein. This is not a solicitation to buy or sell any options, or to purchase or sell any credit spreads. Trading options only carries a high degree of risk, is not suitable for all traders/investors, and you may lose all of your premium money invested in the options. If you have never traded options before, we strongly recommend that you read a little background information made available by the government. Only you can determine what level of risk is appropriate for you. Also, prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options.

Past performances do not guarantee future results. Please consult with your own independent tax, business and financial advisors with respect to any trade. We will noy be responsible for the consequences of anyone acting on this purely demonstration material.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.