In a market known for its power of perfect pricing, nowhere is that more obvious than in Amazon.com, Inc. (NASDAQ:AMZN). But if you’re looking for answers from AMZN stock, that’s only one-half of this puzzling confirmation.
If you’re an Amazon shareholder, Friday’s early morning low of $801 — off more than 4% — wasn’t exactly money in the bank. AMZN stock is on the defensive following last night’s earnings release, which put investors into profit-taking mode.
AMZN Stock by the Numbers
Amazon reported better-than-expected profits of $1.54, beating the Street view by 17 cents. Sales, on the other hand, were short of estimates, at $43.7 billion versus a $44.68 billion bar. For the full year, though, profits quadrupled on a 27% increase in revenues.
The company’s operating income outlook has possibly raised some hairs on the backs of AMZN bulls. A forecast of $250 million to $900 million falls well below the Street’s consensus of $1.33 billion. But it’s not as bad as it looks, as most of the “warning” is tied to aggressive investments in media, fulfillment and India.
As well, while investors are failing to rejoice Friday, Amazon also delivered the goods with its operating cash flow, which jumped by 38% to $16.4 billion.
What’s more, revenues of $3.54 billion from its coveted Amazon Web Services (AWS) unit climbed an impressive 47% over last year’s same-quarter result of $2.41 billion, while contributing 9% to Amazon’s net revenues for the year.
By the “Other” Numbers …
That said, Amazon’s report hasn’t been nearly as punishing from the standpoint of professional options traders.
Based on last night’s 03 Feb $840 straddle market, pricing of $42 for the non-directional spread with AMZN stock at $840 amounted to traders putting the over/under bet at 5% or estimated range from $798 to $882. This weekly contract, which expires today, is the purest play on the earnings event and collectively tells us what traders expect for Amazon shares in the immediate aftermath of the announcement.
Further, as most often it’s the professional options traders and market makers that sell options premiums, the basic assumption is this more informed and disciplined group is collectively wagering on the “under” side of the 5% in AMZN stock.
So far, not only has Friday’s low of $801 in Amazon shares fallen within the forecast by options traders, but relative to past earnings events of the last few years, call and put premiums were decidedly below average.
The historical record shows that over the past five years, the average up or down move in Amazon stock has been 8.4%, with a median reaction of 8.1%. Fine-tuning the price activity down to the last five quarters, AMZN’s average move has been slightly higher at 9%, but a modestly lower median of 7.7%.
AMZN Stock Daily Chart
Click to Enlarge
Take a look at the accompanying chart. If charts don’t lie, then AMZN stock clearly was a double-top pattern.
I’m being facetious, of course. But even if I wasn’t, I’d always look to hedge my directional bet with options and money management opportunities in case I read a chart like Amazon’s with less-than-perfect forecasting.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives 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.
