Two and a Half Ways to Play Amazon Earnings with Options

• Posted by Greg Harmon
• on July 26th, 2011

Amazon (ticker: $AMZN) reports earnings in 2 hours and 20 minutes, after the bell Tuesday. Leading into the report it has had a big run up from 185 to 220 as seen in the daily chart below. Recently is has been building a bull flag between 210 and 220 for the last three week. It shows support areas at 205 followed by 200 and then 197 and 195. It also has a Fibonacci retracement at 193.44 and the 50 day Simple Moving Average (SMA) at about 200 and the bottom Bollinger bands

Amazon, $AMZN Daily Chart

at 203.66. Lots of potential stalling points to the downside. To the upside it is in uncharted territory above 220, with a measured move to about 257. It is set up to pullback based on the falling Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicator that has crossed negative. Moving to the options board $AMZN shows elevated volatility at near 100% in the July weekly options and 46% in the August options compared to historical volatility at 28% and September options at 38%. Using the support and resistance levels above I see three potential plays:

1. Sell July 210 Straddle for 15.10 and buy the July 225 call for 2.73, net credit of 12.37.

This strategy, selling the July 210 call and the July 210 put (Selling the Straddle) and buying the July 225 call, offers downside protection to 197.63 and upside provided that the stock does not close between 222.37 and 225 on Friday. It has additional upside over 227.63. If the stock closes below 197.63 uyou will be put the stock unless you buy back the short put.

2. Sell August 210 Straddle for 19.70 and buy the August 225 call for 4.85, net credit of 14.85.

This strategy, selling the August 210 call and the August 210 put (Selling the Straddle) and buying the August 225 call, offers downside protection to 195.15 and upside gains (outside of a close between 224.85 and 225) on August expiry. If the stock closes below 195.15 you will be put the stock unless you buy back the short put.

2.5. Sell the August 210 Straddle for 19.70 and buy the July 220 call for 4.40, net credit of 15.50.

This strategy, selling the August 210 call and the August 210 put (Selling the Straddle) and buying the July 220 call, offers downside protection to 194.50. There is upside accelerated participation from the July 220 call but the gain needs to be captured more quickly as there is unlimited loss above 225.50 on August expiry. If the stock closes below 194.50 you will be put the stock unless you buy back the short put.

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