Wednesday, April 27, 2011

Amazon (AMZN): Reviewing Options Strategy for Earnings

I try and put together in depth earnings analysis reports in my chat ahead the major reports, and all signs were bullish heading into Amazon (AMZN) yesterday. Here is what I Posted:

OPTIONS RADAR: Amazon Action and Skew Looking for Move Higher on Earnings

Analysis:

Amazon (AMZN) is trading 1.65% lower into earnings and as of 2:15pm is trading 62,000 calls and 49,700 puts, 2X daily calls and 1.5X daily puts. There is mixed offer and bid side action with a positive overall net Delta, and net premium paid in Calls at $265K vs a -$1.64M in put premium played, a bullish bias. Amazon April IV is at 81.6%, May at 37.4% and June at 33%, the April options pricing in a 4.7% earnings move, basically the $175 to $190 range. IV Skew is also showing a bullish bend for April and May, so overall options looking to favor a bullish move. Shares bounced at $180 today, the 20 day EMA, and although the retail earnings are likely to be very strong, the focus will be on all the new growth initiatives with Cloud Music and other projects. Shares have clear resistance at $190, but would target $210 on a breakout. Amazon shares are trading 42.25X earnings, 2.44X sales and 33X cash flow, so a Beat and Raise is needed to trade higher. BofA reiterated a Buy and $198 target into the quarter, but did cite margins will remain under pressure. Deutsche Bank reiterated a Buy and $192 target, saying the Company will deliver despite Japan concerns. The largest trades today include a 1,012 contract May $185 synthetic long position at a $1.70 credit, the April $185/$195/$205 Butterfly Call Spread 430X860, and a few sizable May $180 and $175 put sales. The June $200 calls also trading a fresh 2,000 contracts, so all indications bullish into this report.


Previously that morning I highlighted the April/June $195/$175/$200/$170 Double Diagonal for $3 as a Neutral trade I liked with my targets at $195 and $175 depending on the report.

Later in the day we put that spread on for $3.40 and closed it today at $5.40, a solid 58.8% gain overnight.

The other thing was that I had such a bullish read on Amazon that when I saw it trade down to near $170 after hours I had a strong opinion that shares would bounce back, as you know if you follow my twitter feed. Before the open this morning I was telling clients I was extremely impressed with the earnings and see it as a $200+ stock, and when it broke $186.20 this morning it was go time. Amazon's performance was impressive, and on the open the April weekly calls lost a ton of value with shares opening near flat, and many of my clients grabbed some weekly calls and accumulated 300% profits intraday.The April $185 weekly calls were available at $1.50 this morning, and closed today at $11.95, and the further OTM calls even gained more on a % basis.

The addition of weekly options has allowed for awesome flexibility to trade earnings, both before and after the results are announced. It pays to know what the options market was betting ahead of the quarter, because you can avoid the risk of being involved into the report, and instead play the action the following day.

Definitely an exciting and fun day with Amazon options...expect much of the same in Baidu tomorrow.

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