For those seeking options trading information, here’s a doozey.
An idea from Goldman ahead of the release of Amazon (NASDAQ: AMZN) earnings tonight.
“Buy Mar $180 calls for $8.50 (5% of spot, $176.70) to trade a bullish view on earnings. Given that AMZN implied volatility has typically fallen 22% on earnings for 1-mth vol over the past eight quarters, we see better breakevens with March options given much more limited downside to implied vol post the event, in our view. We estimate that investors who buy March $180 calls would need less than a 2% move to break even on the day after AMZN’s earnings, assuming implied vol for March options fell to 34%, or down 22% from the Feb vol levels of 45%. If shares are flat post earnings, we estimate only an 8% decline in March $180 calls vs. a 20% decline in Feb $180 calls if volatility falls to 35% for both, making the risk/reward of March options more attractive to us. Call buyers risk losing premium paid if shares close below $188.50 (+7%) on Feb expiration.”
… adding, if the calls stay elevated for four hours, consult your physician.
OK seriously, not really my cup of tea, straight buying calls ahead of earnings. AMZN could actually decline too, in which case these calls might go to somewhere between $4 and wallpaper. Volatility could also dip below 35.
Another idea I saw recently was buying the AMZN Feb 180-195 Call spread versus selling the Feb 165 puts at 1-to-1-to-1. The price was about $1 at the time, around 50 cents now. It stands to win big on a rally as the combo could go to the $10-$12 range in a real blast off, and even to $5 in a middling rally to $180. Incidentally, the March 180 calls would be about unchanged on a rally to $180. The issue is more the downside. It’s open-ended. You lose about $5 on each play if AMZN goes to $165. But from there on down, the puts can explode, whereas the calls can only lose another $3.50.
Here’s a radical idea. Why not just short put spreads? You can get about $4 for the AMZN Feb 175-165 Put spread. If you sell two-times as many of these as that other Feb combo you’ll get a good percentage of the win, while having a capped loss on a disaster. The comparison to the call purchase is a little trickier. You have capped downside on both, but the call obviously has a limitless win potential. That’s intuitively very attractive. The real difference though is the middle areas. If AMZN lands after earnings anywhere from the mid $160?s to the low $180?s, the put spread sale likely worked better.
Anyway, these are all food for thought, primarily for AMZN bulls, as I guess all these thoughts assume you expect a post-earnings rally. I have no position.
Follow Adam Warner on Twitter @agwarner.
