AMZN Analysis

Update 10/23/2015: AMZN rose sharply on an earnings surprise, bringing profit to more than half of its potential, and I exited the position, avoiding time risk.

Shares rose by 7.1% over one day, or a +2,601% annual rate. The options position produced a 109.5% yield on debit, for a +39,953% annual rate.

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The online retailer Amazon.com (AMZN), headquartered in Seattle, Washington publishes earnings on Thursday after the closing bell.

[AMZN in Wikipedia]

AMZN

I shall use the DEC series of options, which trades for the last time 57 days hence, on Dec. 18.

Ranges

Implied volatility stands at 48%, which is 3.1 times the VIX, a measure of volatility of the S&P 500 index. AMZN’s volatility stands in the 84th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	668.90	775.24	617.68
Lower	456.24	349.90	507.46
Gain/loss	18.9%	37.90%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

I see AMZN as a bull play, based on analyst expectations of a positive earnings surprise.
Bull put spread, short the $550 puts and long the $530 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
	550	52.1%

The premium is $7.75, which is 39% of the width of the position’s wings. The stock at the time of entry was priced at $562.37.

The risk/reward ratio is 1.6:1.

The strike is $11.30 below the price. The biggest immediate move after each of the past four earnings announcements was $55.11, and the average was $42.81.

Decision for My Account

I've opened a position on AMZN as described above.

-- Tim Bovee, Portland, Oregon, Oct. 20, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.