Schaeffer's Trading Floor Blog

Is Amazon.com (AMZN) Primed for a Big Post-Earnings Move?

It's been a calm earnings season, but perhaps AMZN can break that trend

by 7/24/2014 7:39 AM
Stocks quoted in this article:

Quite the calm earnings season so far. Well, unless you trade aggressively in the first two minutes after the numbers come out. Here's Microsoft Corporation (NASDAQ:MSFT), for example:

Microsoft Corporation (MSFT) Post-Earnings Reaction

There's a lightning quick drop and pop, but by the next open, the shares had gapped up all of 1%.

Similar story in Apple Inc. (NASDAQ:AAPL).

Apple Inc. (AAPL) Post-Earnings Reaction

By the next morning, it had moved less than McDonald's Corporation (NYSE:MCD), at least on the open.

Netflix, Inc. (NASDAQ:NFLX) did drop $20, and Google Inc (NASDAQ:GOOGL) lifted $20, but in percentage terms, those are just in the 4-5% range.

Which brings us to Amazon.com, Inc. (NASDAQ:AMZN), set to report after the close today.

The options board is pricing in a roughly 6% move. That basically means that if AMZN moves exactly 6%, the decline in implied volatility after the news will offset the absolute move in the stock, such that delta-neutral volatility plays will break even for both the shorts and longs. Think straddles and strangles as basic examples of such strategies.

That's a little high in relation to the moves seen in AMZN's high-profile brethren so far this cycle. But AMZN has more of a history of earnings gaps than the Apples and Googles of the world. Shares of the Internet marketplace opened up 7.5% in October 2013, gapped down about 7.5% in January 2014, then gapped down 9% in April. So, given the recent history in and of itself, maybe the options pricing is a little light?

As to direction, well, I tend to look for a stock to react in the same direction it's already moving. But you can kind of argue that both ways for AMZN. The stock's intermediate-term trend is definitely higher, as it's grinded up like pretty much everything else over the last quarter. But longer term, it's still down a bit off its early 2014 highs.

Interest in puts has picked up recently -- though this, too, is well off its relative (vs. calls) highs.

Amazon.com, Inc. (AMZN) Put/Call Open Interest Ratio

I guess what's most noteworthy is that the Schaeffer's put/call open interest ratio (SOIR) has trended up along with the stock this quarter. That's usually a bullish sign, in that traders aren't believing the stock strength.

So here's my bold call: small upside surprise! Oh, and ignore the two-minute initial reaction that's my permanent call in everything, by the way.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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