With Amazon (AMZN) reporting earnings this week, I spent some time over the weekend doing some research and chart work on AMZN stock. I have been watching AMZN recently and have a few ideas on how to trade it going into its earnings announcement.

I thought it would be the perfect time to roll the dice on a big-time earnings trade in which I can use both call and put options to reduce risk and possibly provide a nice payday. Bullish and directional traders can use call options, while bearish traders can play the put options, but having insurance might pay off like a roulette wheel.

Third-quarter earnings season kicked into a higher gear this week, and a flood of notable companies have and will be confessing their numbers to Wall Street. Perhaps the biggest of them all will be Amazon’s.

Amazon will report earnings on Thursday, Oct. 23, after the close. The option pits will be active, and I wanted to cover a possible option strategy, known as a strangle option trade, to play a potential $50-$60 move in the stock.

This could be one of the best times to make an earnings play on Amazon because there is an opportunity for a huge earnings miss or beat, although estimates are for a loss of 74 cents per share. However, the range is so wide you could drive a Hummer truck right through it. The 35 slick-talking pros that cover the stock are expecting anywhere from a loss of 41 cents per share to a loss of $1.31 per share. Any number higher than the highest high could have the bears licking their chops.

I have highlighted the moves AMZN shares have made over the past year after the earnings announcements in red boxes on the chart below. AMZN tested the top of the purple downtrend channel last week. A bounce to $320 by Thursday could come and, from there, it will be a roll of the dice on Friday morning, but it’s a ride that could last a month for Amazon.

On July 24, AMZN fell from $358 to $324 following earnings, and the shares were testing $300 a week later. Amazon reported a loss of 27 cents per share versus expectations for a loss of 15 cents per share, while revenues of $19.34 billion matched estimates. The downside move was nearly $60.

On April 24, AMZN shares sank $34, from $337 to $303, despite matching Wall Street’s profit estimate of 23 cents per share. Revenues came in higher than expected, but, at the same time, Amazon warned of lower revenue for the upcoming quarter. Shares tested $284 two weeks later, making for an overall slide of $53 during that period.

In late January, AMZN was at $403 going into its first-quarter earnings announcement. Shares fell to $358 and then to $340 in the following session for a decline of over $60. Amazon missed estimates by 15 cents after reporting a profit of 51 cents per share. Analysts had penciled in a profit of 66 cents per share. Revenues also came in light of expectations.

On Oct. 24, 2013, AMZN went into earnings at $332 and soared to $363, while registering an intraday high of $368. The $36 move stuck for a few weeks before the stock made an eventual run to $400 in early December of last year. This particular report inspired a $58 move in over a month.

Given this historical earnings track record, another $50-$60 move could occur within in a day or two and up to a month after earnings are released.

To take advantage of the move, I looked at the November (and December) option chains on AMZN to find a possible trade to play its upcoming earnings announcement. The November options have a month before they expire, which should allow enough time for a $50-$60 move based on the historical price action.

At current levels, a $60 move would have Amazon shares at $375 or $265 and would require a 19% swing in either direction.

Amazon has weekly calls and put options, so let’s look at these first. The October chains are listing the Oct. 24 expiration calls, which expire this Friday, and the Oct. 31 options that expire on Halloween. This would allow up to two weeks for a potential “strangle” option trade to play out.

Strangle trades involve the purchase of both a call and a put option with the same expiration dates but different strike prices. The goal is for the stock to move up or down enough in either direction so that the overall increase in premium pays for the entire cost of opening the position. By purchasing a strangle trade, you create a loss point above and below the strike prices. Your profits are above and below that range.

The “Halloween” AMZN October $360 calls could be used to establish the first leg of the trade. The AMZN October $270 puts can be used to create the other leg of the strangle option trade.

It is likely that a possible entry point to this strangle option trade could be entered between $3.25 – $3.50 today. The calls closed Tuesday at $1.35, and the puts closed at $2.10. Together, the total is $3.45. I always suggest using limit orders to get into trades, but let’s use a max entry of $4 to make the math simple for this trade.

In a perfect world, this trade would be a triple-digit, and possibly a quadruple-digit, winner if shares swing roughly 20%.

If shares of AMZN are pushing $375, the October $360 calls would be worth at least $15. The call options would technically be $15 in-the-money. It wouldn’t matter if the October $270 puts sank to zero or a nickel even if the loss of 95%-100% loss looks nasty on paper or in a real trading account. Why is that? Because the call option return would be over 1,000% on the move from $1.35 to $15.

If shares are testing $250 on a terrible quarter and continued losses by Amazon, the October $270 puts would be worth $20. The return on a $2.10 entry price would be 850% if $20 triggers. The calls would lose 95% – 100%.

However, the $60 needs to come by Halloween or both these options could turn into pumpkins as time premium evaporates, or if shares move less than 15%-10%. This is the big risk to the trade and, with volatility relaxing, that is also something to consider.

I have reviewed the prior four earnings time frames and, in each, it took anywhere from two days to a month for a $60 move to play out. This makes the October trade more risky than using the traditional November options, as they expire in less than 10 days.

With the November options offering over a month before expiration, the AMZN November $360 calls could be purchased with limit orders at $2.25 – $2.50 today.

The AMZN November $260 puts could be purchased with limit orders up to $2.25.

This means a strangle trade could be entered between $4.50-$5 with the aforementioned November $360 call and November $260 put options.

A triple-digit return or greater would occur if Amazon shares are above $370 or near $250, as the call or puts would be worth $10 if these price targets are reached by late November. With an entry price of $5 or less, you can see where the triple-digit payday comes into play.

The risk of this trade turning into a turkey would be if Amazon shares stayed between $350 and $250 over the next month, as these options would expire worthless. However, some premium could be saved if the position is exited on Friday, but that is where most traders instantly lose money.

“Plan the trade, trade the plan,” as I like to say.

Of course, the assumptions are for a trade in a perfect world, but there are a lot of unknowns in the market. One contract for each call and put option could cost $450-$500 for the November strangle option trade. This would be the minimum amount to play this trade — certainly not a small amount of capital.

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