It’s been a friendly trend for Amazon.com, Inc. (NASDAQ:AMZN) stock investors off and on the price chart. But with earnings Thursday night and expectations somewhat high for AMZN stock, being an optimistic but frugal buyer is made a good deal easier courtesy of a modified bullish spread strategy. Let me explain.
Since reporting its third-quarter results in late October, AMZN stock is up nearly 48% and trading at all-time-highs. To say that’s going to be a tough act to follow is probably an understatement. At the same time, I wouldn’t bet against the tech giant faltering or simply falling out of favor with Wall Street just yet either.
By the numbers, as well as items of special interest to investors betting on or against AMZN stock, for starters, the company’s fourth quarter is expected to generate profits of $1.85 per share and revenue of nearly $60 billion. Street forecasts peg growth rates for Amazon’s bottom and top lines at 20% and 37%, respectively, and the largest in two years.
Digging a bit deeper, investors will be eager to see the results of the company’s cloud business, Amazon Web Services, as the unit has been a significant growth driver. Also of certain interest, updates on Amazon’s “cashier-less convenience stores,” spending tied to original SVOD content, its second HQ or ‘HQ2’ site, and more details on its Whole Foods strategy, are all bound to give bulls, bears and algorithms a bounty of information to gnaw through.
AMZN Stock Weekly Chart
Looking at the price chart of Amazon and one might wonder if it’s too late to shop for AMZN stock in front of Thursday night’s earnings report? I’m of the mind the run in Amazon stock isn’t finished, but that forecast would be quickly tempered if shares gap significantly higher following its announcement.
A steeper trend, which some might say is already parabolic, is a moderate concern. But trumping those worries, for the time being, is last quarter’s corrective cup. That price consolidation allowed for a healthy base count reset. This should provide some room for AMZN stock to move higher before an overbought situation becomes too extreme short term.
AMZN Stock Bullish Long Modified Butterfly
Earnings reactions in AMZN stock have the ability to sting either bulls or bears with a large price gap. Past reports are supportive of that possibility and Thursday night’s release has the earmarks of keeping this tradition alive.
Considering this potential, but not technically convinced AMZN is done rallying barring an explosive gap higher, a very short-term modified butterfly position is attractive. This type position greatly reduces and limits risk and allows for significant returns if shares move higher immediately following the earnings report.
Reviewing AMZN stock’s options board, the ’02 Feb $1460/$1500/$1520 call butterfly for up to $10.50 is a favored combination. With shares of AMZN at $1438 this spread’s break-even is roughly 2.25% above the current price at $1470.50. A max profit capture of $29.50 at $1500 is possible if AMZN settles at the strike on Friday. That’s nearly three times the spread’s low 0.70% of AMZN stock risk.
Lastly and unlike a traditional long butterfly with equal size embedded verticals, this combination offers a tighter $20 bear spread relative to the $40 bull call spread. Thus, if AMZN pulls off a bullishly exaggerated and what I’d call a parabolic reaction, this trader can feel free to fade the extreme price movement with some of their secure $9.50 in profits above $1520.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
