Earnings junkies are prepping themselves for one of the favorites of the earnings season, Amazon.com, Inc. (NASDAQ:AMZN). The stock is a mover and a shaker among the big-cap names, often entertaining spectators with monster post-earnings moves.
Let’s hone in on the options market to gauge expectations heading into Amazon earnings.
The cycle of implied volatility (IV) is on full display in AMZN stock these days. Since the internet giant is a notorious earnings gapper, we see option premiums consistently inflate in anticipation of the quarterly event.
The volatility ramp has currently driven IV to 43%, which is on par with where it sat prior to the previous two earnings announcements.
To gauge just how much Amazon stock is expected to move after earnings, we turn to the value of the weekly straddle. Since AMZN is nestled at $387.50 at the time of this writing, we’ll look to the cost of the Apr 24 $387.50 straddle, which consists of buying the 387.50 call and put option.
The net cost is around $29.70, which means option traders are expecting about a $30 move higher or lower in AMZN by week’s end — that’s a jump of 7.6% or so.
Pick Your AMZN Earnings Poison
For those willing to traverse the tricky route of directional earnings bets I offer up the following two ideas – one for bulls and one for bears.
Bull Put Spread: If you think Amazon stock can duplicate last quarter’s post-earnings boom, consider selling out-of-the-money May bull put spreads. Sell the May $350/$345 put spread for 95 cents or better. The maximum reward is limited to the initial 95-cent credit and the maximum risk is limited to $4.05.
By going all the way down to $350 you’re outside of the expected gap area, granting you a high probability of success.
Bear Call Spread: If you’re skeptical of AMZN stock’s lofty price levels and think the bears have the upper hand, sell out-of-the-money May bear call spreads. Sell the May $425/$430 call spread for 90 cents. The maximum reward is limited to the initial 90-cent credit and the maximum risk is limited to $4.10.
Similar to the bull put spread, this bear spread also resides outside the expected earnings gap zone, thereby providing a high probability of success.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
