Amazon (NASDAQ:AMZN) is perking up ahead of its quarterly report. Robust earnings from other tech giants spurred the awakening and has buyers returning to the sector. Those waiting for signs of life before buying Amazon stock needn’t wait any longer.
Let’s take a closer look at the bulls’ return to tech and how to trade the e-commerce giant’s shares into next week’s announcement.
I find sector performance during bull markets fascinating. Leaders eventually lag, and laggards eventually lead. The best bulls, in other words, eventually drag everything higher. Pauses are brief and refresh to the upside as traders move from overheated areas into those that are less so. Such has been the behavior of our current market since the 2020 March low. And, it’s been glorious.
Netflix Earnings Brought Buyers Back
The recent interplay between tech stocks and small-caps provides a master class in this dynamic.
The Russell 2000 scored its largest quarterly gain to close out 2020 at 31.4%. For its part, the tech sector only scored an 11% gain. Still impressive, yes, but not nearly so. The underperformance continued through the first two weeks of the new year. Then Netflix (NASDAQ:NFLX) earnings flipped a switch, and everything changed.
Wall Street cheered its optimistic forward guidance and bid NFLX up 16.9% in a single session. Investors suddenly warmed to the rest of the tech sector, and we’ve seen nothing but leadership since. The zeal for stocks like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon and the like is understandable. If their post-earnings reactions are anywhere close to that of Netflix, then big profits await shareholders.
As I write this Tuesday evening, Microsoft just unveiled a 17% jump in revenue and smashed EPS estimates. Its price jumped as much as 6% in the after-hours session.
Amazon Stock Is on the Move
For its part, Amazon stock has spent the past quarter stuck in a narrow $300 range between $3,070 and $3,370. It’s been a downright bore, especially after the fireworks-of-a-rally that more than doubled its share price from last March to August. Long-term market watchers know that volatility alternates between expansion and compression. Big moves are followed by small moves and vice versa. The rotation from one to the other isn’t perfect, but it tends to hold over time.
The past few months could be considered a coiled spring with pent-up energy looking for release. If the current pre-earnings bid-up succeeds in breaching the top end of the range ($3,370), we could finally put this whole consolidation business behind us and begin trending higher anew. The main item you must consider is whether you’re comfortable holding into earnings. It’s a tempting proposition, to be sure. If Amazon stock follows in the footsteps of MSFT and NFLX, then instant overnight profits are in store. Then again, it could go the other way.
I wouldn’t bet on bears, though. They’ve been impotent for months, and fighting the trend seems foolish.
Two Earnings Trades
When building a bullish-leaning options trade into earnings, you have two choices. Shoot for a high probability of profit and willingly accept a lower return, or go for a higher return but lower probability of profit. The first one is a bull put; the second a bull call.
Bull Put: Sell the March $3,000/$2,990 put vertical for $2.25.
You’re risking $7.25 to capture $2.25 if AMZN sits above $3,000 at expiration. The probability of max profit is 80%.
Bull Call: Buy the March $3,450/$3,460 call vertical for $3.75.
You’re risking $3.75 to capture $6.25 if AMZN climbs above $3,460 by expiration. The probability of max profit is 45%.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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