Amazon: Option Earnings Plays

| About:, Inc. (AMZN)
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By: John J. Critchley, Jr.

Amazon (NASDAQ:AMZN) is set to report earnings after the bell on Thursday. Analysts, on average, are expecting a loss of 7 cents per share and revenue of $13.92 billion. In July, the online retailing giant said that it expected third-quarter revenue to grow between 19 percent and 31 percent year over year. Click here

Currently, 44 analysts have a rating on AMZN with 9 maintaining buy ratings, 21 outperform and 13 holds. It is interesting to note that there is only one analyst with a sell rating on the underlying despite an astronomically high P/E of over 100. Even AAPL, the most beloved stock in the universe has two analysts who have slapped a sell rating on the tech darling.

The price movement of AMZN has left some in the investment arena to wonder if the online retailing juggernaut's recent dramatic selloff from recent highs over $260 hit just a few weeks ago is overdone. Down over 13% from these recent levels, many may smell a bargain.

Most paramount in the release and the post-release conference call will be AMZN's sales forecast for the current quarter, which includes the ever important holiday shopping season. There will also be much interest in AMZN's profitability. The year over year increases in revenue for AMZN has been impressive over the years, but at what cost to the bottom line? When will they actually start making real substantial profits to justify such a lofty valuation?

Options Plays

Trade idea #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 13% off its recent highs, the implied volatility of the options is 6.7% from its 52 week highs. The 30 day implied volatility is trading around 47.21%, quite a bit less from the 52 week implied volatility high of 53.92% hit in January of this 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 October 26th 2012 weekly 230 straddle for $ 19.75. The implied volatility of this straddle is seemingly quite high at approximately 121% IV (Implied Volatility). This IV reading is, however misleading because the most important determinant of an option's real value as it gets closer to expiration is the premium only, not the actual IV% reading. The premium over parity (POP) number of $19.75 is what is really paramount.

Net debit: $19.75

Why the 230 line? You are buying the At-the-Money straddle for $19.75. The breakevens for this straddle in the underlying are $210.25 and $249.75 respectively. These breakeven points represent a 8.5% move in the underlying.

If we look at the last four earnings releases, we see that the average non-directional based percentage move has been 10.95%

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 money 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 October 26th 2012 weekly 240/245/250/255 call condor for $ .85.

The trade is:

A) Long 240 call

B) Short 245 call

C) Short 250 call

D) Long 255 call

Net debit: $.92

Why these strikes? The sweet spot for this trade is anywhere between $245 and $250 by Friday 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 7.50% move in the underlying and roughly coincides with the market's expectations of the post earnings move in AMZN.

Max Profit:

  • Max Profit = Strike Price of Lower Strike Short Call (245) - Strike Price of Lower Strike Long Call (240) - Net Premium Paid. $5 - $.85 = $4.08
  • Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Calls ( between 245 & 250)

Max Loss:

  • Max Loss = Net Premium Paid.
  • Max Loss Occurs When Underlying <= Strike Price of Lower Strike Long Call (240) or Price of Underlying >= Strike Price of Higher Strike Long Call (255). To translate: When Underlying is below $240 or above $225.


  • Upper Breakeven Point = Strike Price of Highest Strike Long Call (255) - Net Premium Paid. $240- $.92 = $254.15
  • Lower Breakeven Point = Strike Price of Lowest Strike Long Call (240) + Net Premium Paid. $240 +$.92 = $240.92


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 215/210/205/200 put condor. The risk of this trade is the debit $.81; reap a $4.19 profit if the underlying is between $210 & $205. If AMZN is above $215 or below $200, you will lose the entire premium.

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


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 NOT 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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.