Amazon.com’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.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Barron's and is being posted with permission from Barron's. The views expressed in this material are solely those of the author and/or Barron's and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
Disclosure: Options Trading
Options involve risk and are not suitable for all investors. For more information read the Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD). To receive a copy of the ODD call 312-542-6901 or copy and paste this link into your browser:
http://www.optionsclearing.com/about/publications/character-risks.jsp
