This Big Bet on Amazon’s Earnings Could Pay Off Handsomely. It’s Not for the Faint of Heart.


Visit: Barron's’s earnings report is always one of the great events in the stock and options market. At about $3,000 a share, the e-retailer’s securities always lure wealthy investors who like to try their luck at a high-stakes trade that can produce extraordinary rewards.

Selling a put or buying a call before earnings can create substantial profits for anyone with the resources to finance the trade. Amazon (ticker: AMZN) is scheduled to report second-quarter earnings late Thursday. If the stock trades higher on the report, anyone who sold the cash-secured put stands to make a pretty penny, while the value of the call should surge.

Of course, many investors will tremble at the thought of committing so much money to one trade, with each options contract covering 100 shares, but it happens every day. Investors with ample resources regularly trade options on mega-stocks with prices that exceed $1,000, including Amazon, Alphabet (GOOG), and others because the returns are so attractive if everything goes as planned.

Should those trade sour, leaving the investor with the shares, few people care because the underlying fundamentals of the businesses are solid. Amazon, as everyone knows, is thriving during the Covid-19 pandemic because everyone loves having the world delivered to the safety and comfort of their own homes.

If you can handle the specter of spending $300,000 for 100 shares of Amazon stock–and don’t snicker, many investors can–here’s a trade to consider.

With Amazon’s stock trading around $3,058, investors can sell the July $3,055 put that expires Friday for $124 and buy the July $3,065 call for $120. The risk-reversal–that is, selling a put and buying a call with a higher strike price and same expiration–positions investors to buy the stock at a lower price, while participating in any advances.

In the options market, Amazon is priced as if the stock will move $253, up or down, in reaction to earnings. The expected movement is calculated by pricing the straddle, which is the cost to buy a call and put that matches the stock price. The straddle math is not terribly sophisticated, but everyone uses it as quick shorthand for stock moves.

If the stock is at $3,318 at expiration, the call is worth $253, or technically $25,300 since every options contract covers 100 shares of stock. If the stock is below the put strike price at expiration, investors are obligated to buy the stock at the $3,055 strike price, or to cover the put. Some will criticize an approach that only makes $25,300, and that exposes an investor to the risk of buying a $300,000 stock, but many investors do just that to generate cash.

The trade drips risk and reward, especially since many big technology stocks have reported good earnings reports and still declined because investors thought results were not as good as they wanted.

Without doubt, do not even consider this trade if you lack the money to buy 100 shares of Amazon. But if you have the cash, and you have a taste for volatility and chaos, Amazon’s earnings report is for you.

Originally Posted on July 29, 2020 – This Big Bet on Amazon’s Earnings Could Pay Off Handsomely. It’s Not for the Faint of Heart.

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