Yet Another Earnings Trade

• stevenplace
• April 22nd, 2010

AMZN

Trend is up and there is strong support at 130. The stock is breaking out going into earnings, and if the overall rate of change (the channel) holds into opex we should see price between 155 and 170.

Implied volatility is still fairly elevated to HV (the blue line) but not as much as it was in January. You can see the October blowout in actual volatility, when AMZN made that monster upside move after earnings. I don’t think that’s going to happen again, but I want to be more bullishly positioned.

The past 4 earnings have seen relatively muted reactions in volatility buys, except for the October move, which was quite exceptional.

The important thing to see in this trade analysis is the options skew. The skew is fairly steep into earnings, which means players are putting a higher relative premium on OTM puts– this is normal going into an event because disaster protection generally costs more on a relative basis in options.

So here’s how we’re going to play it: I’m not expecting a huge upside surprise, but I’m not expecting a collapse below the 50 DMA.

SELL -3 VERTICAL AMZN 100 MAY 10 160/165 CALL @.95 LMT

SELL -3 VERTICAL AMZN 100 MAY 10 135/130 PUT @1.14 LMT

Risk: 873

Reward: 627

Return on Risk: 71.8%

As you can see by the return on risk, this is a bit more speculative, but remember that there’s more premium because May is a long options month.

Now for exits, remember that the short strike in the gap direction is going to hurt the most so that’s where you’re going to want to focus on. If the move is dampened, I want to cut the position on a $300 gain.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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