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Schaeffer's Daily Option Blog Earnings Draw Out Short-Term Option Players

Investors looking for increased volatility from AMZN through the end of the week

by 1/30/2013 11:26 AM
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Online retail giant, Inc. (NASDAQ:AMZN - 272.45) may have missed Wall Street earnings estimates on Tuesday, but investors don't seem to mind, judging by how the market opened today. AMZN stock was trending up in after-hours trading, and jumped more than 8.5% at the opening bell. Ahead of its report, AMZN drew a lot of attention from the options crowd, though, with put and call volume both nearly quadrupling the normal amount Tuesday. About 138,000 puts crossed the tape Tuesday, and more than 125,000 calls changed hands.

The weekly 2/1 270-strike call was the most popular, with nearly 11,000 contracts traded. Implied volatility rose at this strike yesterday, and open interest climbed overnight, signifying new initiations. With a volume-average weighted price (VWAP) of $11.58, traders who bought the calls are hoping that the stock climbs 3.4% by Friday on the tailwind of the earnings report to close above $281.58 (strike plus VWAP). If it doesn't, all the traders would lose is the premium paid.

Yet there was plenty of bearish action on the same price point and expiration date, however. The 2/1 270-strike put saw nearly 9,000 contracts trade, almost half of which were added as new open interest this morning.

What's more, symmetrical blocks of 1,089 contracts traded off the ask price at both the 270-strike call and 270-strike put at the same time, suggesting some investors may have been executing a long straddle at the $270 mark. The total cost of the straddle was $26.53 ($13.41 for the call and $13.12 for the put), making the breakeven prices $296.53 and $243.47 (the strike price plus or minus the combined premium, respectively). In other words, AMZN has to rally 8.8% from current levels (or drop 10.6%) -- by Friday's close -- for these straddle buyers to be profitable.

Technically, AMZN has been on a bit of a tear since hitting its recent low of $218.18 on Nov. 15, up 27.3% in that time, and jumping 10.7% so far this year. Tuesday the company announced earnings of 21 cents per share and a strong holiday season, but still below the 28 cents predicted by the Street. Still, many analysts were still pleased by reports of a 70% jump in the Kindle division in 2012, as well as signs AMZN is starting to gain traction as an alternative to Apple Inc. (NASDAQ: AAPL - 458.59) for cloud-based services such as music and video. In fact, more than a dozen analysts raised their price targets on AMZN this morning.


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