Playing Implied Volatility Crush From Earnings Announcement On Amazon (AMZN)

Feb. 01, 2012 2:52 AM ETAMZN
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Contributor Since 2011

Top Gun Options Strategic Mindset: Playing IV Drop from Earnings Announcement

Target: AMZN Trading @ $193.88

Commit Criteria: (AMZN) Amazon has its Implied Volatility (IV) in the near term weekly options at an excessively high 128%. The March expiration options have an IV of roughly 48%. Right after the Earnings Announcement tonight the IV of AMZN will drop significantly. By selling a position in the near term weeklies and protecting ourselves in the Advanced Model Portfolio with the March exp options we should be able to capture the crash in IV while keeping moderately protected from price movement. We are looking for possible price movement but for it to stay between the $170 to $220 price range until the exit of this trade. We will likely hold this trade until the weekly short positions expire, giving us the max profit.

Tactical employment:

  1. Buying to Open 5 AMZN Mar 2012 195 Calls
  2. Selling to Open 5 AMZN Feb 2012 Weekly 205 Calls
  3. Selling to Open 5 AMZN Feb 2012 Weekly 180 Puts
  4. Buying to Open 5 AMZN Mar 2012 190 Puts
  5. As a Custom Trade
  6. For a net Debit of $14.68 ($1468 per position for a total of $7340)
  7. Maximum Gain: $4000 estimate
  8. Maximum Loss: $4000 estimate

Mid-Course Guidance: We will be watching for a good exit point as early as tomorrow with the possibility of letting the short positions expire on Friday. If the price moves outside our safe range of $170/$220 we will be exiting this trade to protect against further losses.

Profitability Target: We will allow the short position to expire worthless and capture rough $3000 + in profits

Exit tactic:
Allow short positions to expire worthless and immediately close the long protective positions.

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

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