The earnings beat rolls on this week with many of tech’s heaviest hitters stepping up to the plate. Amazon (AMZN) earnings will be unveiled Thursday post market, so let’s take a deep dive into the stock ahead of the event.
On the technical front, AMZN has been firing on all cylinders. Its stock price held strong during the recent market swoon and was one of the first to surge to new highs once the selling pressure in equities finally lifted.
Amazon stock is up 14% in the past two weeks alone, so it’s fair to say optimism is running high into earnings. Accumulation days aplenty have cropped up during the recent ascent, showing heavy buying by the big boys.
To gauge market expectations heading into Amazon earnings, we can use the price of the July 24 weekly straddle that expires end of day Friday. Currently the July 24 $485 straddle costs $44.25, effectively pricing in a 9% move higher or lower in AMZN stock over the next few days. For reference, the average gap in AMZN following its last four earnings releases was around 11%. So current expectations seem to be in line with its recent behavior.
As usual, implied volatility is running hot in AMZN options ahead of earnings. At 48% the implied is nestled close to levels seen in three of the past five earnings events.
Traders looking for AMZN stock to score a Google-esque earnings reaction might be willing to enter a long volatility play here, but it’s a long shot. Nailing the occasional outsized gap certainly bolsters the ol’ ego, but it’s a tough bet to profit from consistently.
Amazon Earnings Play
The higher odds play is to sell the high implied vol using some type of short option play. Those willing to bet AMZN stock gaps as much or less than expected could sell a July 24 weekly iron condor.
The trade consists of selling an out-of-the-money bull put and bear call spread in hopes that the stock remains between the short put and call strike.
To increase our odds of success we could sell options outsize of the expected gap range. Sell the July 24 $555/$560 AMZN call spread for 50 cents and sell the $420/$415 put spread for 52 cents. The max reward is limited to the initial $1.02 net credit and will be captured provided AMZN remains between $420 and $555 by this Friday.
The max risk is limited to the distance between strikes minus the net credit, or $3.98, and will be lost if AMZN stock rallies above $560 or falls below $415.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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