Thursday, April 21, 2016

AMZN Analysis

Update 4/29/2016: My do-nothing decision paid off as AMZN gapped sharply to the upside after earnings were published, quickly reaching half of potential profit. In line with my guidelines, I exited, preserving my profits.

Shares rose by 4.1% over eight days, or a +188% annual rate. The options position produced a 99.4% yield on debit for a +4,356% annual rate.

Update 4/28/2016; The actual AMZN earnings announcement has arrived. AMZN publishes earnings on Thursday, April 28, after the closing bell. My position of a week ago is still on the books. Where does it stand and what is to be done?

Tye share price as of this writing is $622.13, or $12.13 into the profit zone, although the position is presently loss-making because the volatility hasn't fallen and time decay hasn't done its work to make this short position profitable.

If AMZN closes above $610, at expiration in mid-June, then the position will be maximally profitable.

My options are 1) keep the present position as is, 2) add a bear call spread, turning the full position into an iron condor, 3) add a further out of the money bull put spread, or 4) add a full iron condor. All of the new positions would be the JUN series, same as the original position.

Given the present options grid, I would structure the bear call spread in  #2 and the call half of #4 as short the $685 call and long the $695 call, with an 81.7% chance of expiring out of the money.

I would structure the additional bull put spread in #3 and the put half of #4 as short the $530 put and long the $540 put with an 84.5% chance of expiring out of the money.

The action in #2 and #4 add about $7 of downside protection to the profit zone., not a lot for a stock as high priced as AMZN.  The action in #3 and #4 put a limit on my upside profit at $690, compared to an unlimited upside profit zone in my present position.

Given the fact that AMZN has risen after three of the last four earnings announcements, and the reality that brokerage analysts remain highly enthusiastic about the company's prospects, I judge that protecting the unlimited upside profit is of greater value than adding a pittance to the downside zone of profit.

The share price dropped $33 over the past week -- about 5% -- a slightly bearish move. However, it broke through no support levels and today rose by $20, cutting the net decline from my entry point to only 2%. 

History, analysts and chart all argue for action #1 -- keep the present trade and do nothing -- and that is indeed what I shall do. 

The online retailer (AMZN), headquartered in Seattle, Washington publishes earnings April 28 after the closing  bell. (I discovered after doing the trade described below that I was relying on outdated information for the earnings date. I thought it was Thursday, April 21; it's actually a week later. In any case, no harm done.)

[AMZN in Wikipedia]


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


Implied volatility stands at 42%, which is triple the VIX, a measure of volatility of the S&P 500 index. AMZN’s volatility stands in the 66th percentile of its most recent range. The price used for analysis was 633.79.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

A book from my library →

The Trade

AMZN achieved an all-time peak in December 2015 and then declined into a low a Feb. 9. It has since bounced back to the upside, recovering more than 62% of the decline. A persistent break above $696.44 will put AMZN into an uptrend.

Brokerages in aggregate give AMZN a 57% enthusiasm rating, with 73% of 30 analysts issuing strong buy recommendations.

The share price has closed higher after the first trading session following three of the last four earnings announcements.

The chart is such that I can't rule out a continuation of the uptrend, and brokerage opinion is wildly positive. I shall structure the position as a bull play.
Bull put spread, short the $610 puts and long the $600 puts,
sold for a credit and expiring June 19.
Probability of expiring out-of-the-money
The premium is $3.47, which is 35% of the width of the position’s wings. The stock at the time of entry was priced at $634.25.

The risk/reward ratio is 1.9:1.

The zone of profit in the proposed trade covers a $24.25 move below the entry price and everything to the upside of it. The biggest immediate move after each of the past four earnings announcements was $55.11, and the average was $46.46. After eliminating the maximum and minimum post-earnings movements, the core tendency is $47.80.

Decision for My Account

I have opened a position in AMZN as described above.

-- Tim Bovee, Portland, Oregon, April 21, 2016


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

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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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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