Online retailing giant Amazon.com (AMZN) will step up to release its second-quarter earnings figures after the close of trading this afternoon, and could be ready to make an advance.
Let’s first look at the background of AMZN’s report, then explore an options strategy.
Wall Street is expecting the retailer to post a profit of about 5 cents per share, while revenue is seen rising 23% year-over-year to $15.74 billion. Investors will be scrutinizing the numbers for continued revenue growth, especially overseas sales, as well as the continued effect of digital content acquisition on gross margin.
Already this quarter we have seen eBay (EBAY) offer up weaker-than-expected guidance due to poor sales growth in Europe and the U.K. Furthermore, Google (GOOG) reinforced the notion of slow e-commerce after reporting quarterly results that fell short of expectations.
Fortunately for Amazon, consumer activity in the U.S. remains healthy, leading analysts to remain largely positive in regard to tonight’s quarterly report. In fact, Amazon’s second-quarter whisper number arrives 3 cents higher than the consensus at 8 cents per share, according to EarningsWhisper.com
Additional optimism can be found in Amazon’s ratings backdrop. For instance, data from Thomson/First Call reveals that AMZN has attracted a whopping 31 “buy” ratings, compared to 12 “holds” and no “sell” ratings. That said, the shares are trading a mere 7% shy of the consensus 12-month price target of $320.14. This target could cut both ways for AMZN, leaving the door open for potential target increases, or drive ratings downgrades as the shares become “fully valued” or “priced for perfection,” with Amazon’s quarterly report weighing heavily in the balance.
While analysts have high hopes for AMZN, the options crowd is not buying into the rally. In the front two months of options (including July weekly options), AMZN sports a put/call open interest ratio of 1.18, with put open interest easily outstripping call open interest. The bearish sentiment read on this ratio is even more prominent given that options traders historically tend to have a more bullish slant heading into a company’s earnings report.
Focusing on the soon-to-expire July weekly options reveals a similar bearish attitude, with a weekly put/call open interest ratio of 1.2. Peak July call open interest totals 2,049 contracts at the overhead 320 strike, while peak put open interest of 2,703 contracts resides at the 275 strike. Remember that these option contracts expire at the close of trading tomorrow afternoon, making any activity in July weekly options today highly speculative in nature.
Click to Enlarge Drilling down on July weekly options reveals that implieds are pricing in a potential post-earnings move of 6%. This places the upper bound near $318, while the lower bound lies at $282. A rally to $318 would push AMZN toward another all-time high, this time north of short-term resistance at $310. On the other hand, a drop to $282 would leave AMZN pinned between its 10- and 20-week moving averages.
With the stock fresh off a controlled pullback from all-time highs, AMZN shares appear to have digested the warnings provided by eBay and Google’s quarterly reports. As such, the stock might be primed for a post-earnings pop, making an August 300/320 bull call spread a potentially profitable play.
At the close of trading on Wednesday, this spread was offered at $7.15, or $715 per pair of contracts. Breakeven lies at $307.15, a 2.4% gain from yesterday’s close, while a maximum profit of $12.85, or $1,285 per pair of contracts, is possible if AMZN closes at or above $320 when August options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.