Here’s What Happened With the Amazon “Loophole Trades”

Having a good, actionable plan on a trade idea actually come to fruition is a good thing. Acting in a timely fashion when that good fortune presents itself is even better.

Last week, we explored whether or not Amazon.com Inc.‘s (NASDAQ:AMZN) upcoming earnings announcement was a good opportunity to pursue our favorite non-directional trading strategy, the Straddle.

Ultimately, we decided – thanks to my Money Calendar data and my earnings analysis tool – that a Straddle was not the most profitable way to play the news event.

While volatility surrounding AMZN shares suggested that traders were worried about the company hitting estimates, history showed that AMZN was poised to make a bullish move after earnings. So Money Calendar gave us three different bullish “loophole trades” with varying levels of risk to choose from.

So today, let’s take a look at how each of those trades did following AMZN’s highly anticipated earnings announcement…


On Thursday, I told you that if you believed AMZN could pop $50 by Friday morning, it made sense to choose between one of the following bullish loophole trades:


AMZN October 23 2015 $575 (AMZN151023C00575000) calls mid quote at $18.85
AMZN October 23 2015 $600 (AMZN151023C00600000) calls mid quote at $9.52
AMZN October 23 2015 $615 (AMZN151023C00615000) calls mid quote $6.15
AMZN October 23 2015 $625 (AMZN151023C00625000) calls mid quote at $4.02
Prices as of Wednesday, October 21 Noon EDT

I also told you what would happen profit-wise on these positions if/when AMZN closed above the short strike, ($625) at expiration.

The charts below have all been updated with prices as of Thursday’s close on AMZN prior to the earnings report. I did that to point out exactly where max risk takes place on a given “loophole trade.”

The Wide Spread – AMZN 575/625 Call Spread


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The Intermediate – AMZN 600/625 Call Spread


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The Skinny Spread – AMZN 615/625 Call Spread


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Going into Thursday evening, AMZN looked great as earnings pushed the stock past $635.

If only we could trade options after hours!

Fast forward to Friday morning… and take a look at the chart below.


This chart represents the first half hour of trading. AMZN opened below $620 and immediately retreated downward. As any long trader would say, “Buy the rumor, sell the news.” That’s exactly what happened Friday morning.

Now, let’s take a look at how the three “loophole trades” reacted:

The Wide Spread – AMZN 575/625 Call Spread


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Looking at the ranges of each option in the first 30 minutes, it seems that the spread between both options went from $40.60 to $25.49. So this trade more than doubled in value during the opening range of the spread.

The Intermediate – AMZN 600/625 Call Spread

The Skinny Spread – AMZN 615/625 Call Spread


Click to View

In this example, the price range of this spread went from $16.95 to $4.96 in the first 30 minutes of trading. Again, based on last week’s prices, there was more than a double here off the opening range.  

The Skinny Spread – AMZN 615/625 Call Spread


Click to View

Finally, the cheap spread traded between $7.66 and $1.49 in the first half hour of trading. This one also more than doubled just after the open.

So which one represented the best spread? 

Well that’s probably up for debate depending on the trader, the risk, and most importantly, the exit.

So how do you set up for your double ahead of time and avoid the stress that inexperienced traders often feel with a trade like this? 

By having an exit plan already in place!

Close Your Trade With This Powerful Order

By now, you should know my goal is to get a double or 100% return on my invested capital. My Money Calendar Alert subscribers know this, as I give them detailed exit instructions – usually at 100% profits – on each trade that we take.

Obviously, we want to maximize our profitability, but, when I get a double, that is where I like to close out my trades. Even aggressive traders take at least half of their position off when it reaches 100% profit.


We talk about this often here at Power Profit Trades, but it bears repeating: The best way to grab your 100% return in fast-moving markets like we saw on Friday is by identifying your profit target and placing a Limit Order ahead of time to get out at your desired price.

As you can see in the above example, I am just reversing the position, closing the trade for double what I bought it for. You may have to wait until the market opens to get an idea of what the spread is trading for, but you could just put it in and wait.

If it fills at your price, great! If not, re-evaluate, cancel, and replace your order for a bit less.

Remember, the less time until expiration, the more attention your need to give your trade.

The lesson here is having a plan in place for the complete trade. In fact, you should have your exit plan in place before you even have your trade in place.

In the case of any of the AMZN loophole trades – and it doesn’t matter which one you followed – you should know both the target price on the stock and what you want to sell-to-close your option for.

If you get your double or better, great!  If the trade is not going your way, take what you can get – that means the trade plan is over and it’s time to move on to the next trade opportunity.


Here’s your trading lesson summary:

  1. AMZN rocketed above our targeted strike price during afterhours trading Thursday.
  2. For about 30 minutes after the market opened Friday, all three of our “loophole trades” showed a double before the stock retreated back toward $600.
  3. A Limit Order to close at your desired profit-target is the best way to get out of a trade in a fast-moving market. If you can’t manage a double, take whatever profits you can.


Good trading,

Tom Gentile

6 Responses to “Here’s What Happened With the Amazon “Loophole Trades””

  1. I bought AMZN calls on Tuesday to get in ahead of the earnings announcement. I bought AMZN 600 CALLS for Nov. 6th 5K worth and the next day 3K in AMZN 600 calls for Nov 13th expiration…..I have not done options in 25 years so I went to a schwab class first, what suprised me is I only made 1K on the 5K and got out, then kept my Nov, 13th calls and I’m up 700 on 3K, but since AMZN is such a big mover it does not give you the expected 2-1 0r 3-1 returns unless you take the MUCH bigger risk and had bought the Oct. 23rd calls……since new to options wanted more time, but got a lot less than expected.
    Pete

  2. RICHARD MacADAMS

    I FOLLOWED YOUR ADVICE: I BTO AMZN OCT23, 615 CALLS AND STO OCT 23, 625 CALLS FOR NET $2.27 DEBIT. I THEN SET STC AMZN OCT 23, 615 CALLS AND BTC AMZN CALLS AT NET $6.00 CREDIT. SELL ORDER WAS NOT EXECUTED. LATER IN THE DAY I GOT OUT AT 20 CENTS INSTEAD OF $6.00. FROM YOUR COMMENTS TODAY, I TAKE IT THAT, EVEN THOUGH YOUR CHART SHOWED A POTENTIAL FOR $6.00, I SHOULD HAVE BEEN SATISFIED WITH A DOUBLE. IS THAT CORRECT?

  3. Wish the instruction given last week was as detailed as the one in this presentation. I am a relatively new option trader and was afraid of making mistakes in the complicated vertical option like this, so I missed the opportunity.

  4. I will say it again… This was not a specific trade recommendation, as we do with the Money Calendar Alert. This was an article on curbing risk through options that happened to include some potentially profitable recommendations. That being said, my Money Calendar subscribers know exactly what we aim for when getting into each and every trade… 100%. The shorter the trade, is the more important it is to have your trade plan mapped out and your limit orders in place ahead of time.

    For those of you who are still unsure of what a loophole trade is, and the costs, risks, and potential rewards associated with it, you shouldn’t be placing the trade. In my years of trading, I’ve discovered (often the hard way) that you need three things before you make a trade: knowledge, planning, and experience.

    KNOWLEDGE – Jumping into anything without thoroughly understanding it is a mistake, especially when it comes to money. If you’re still unsure of how the “loophole trade” works, here’s a great place to start:

    https://powerprofittrades.com/2015/07/power-profit-trades-the-power-of-the-loophole-trade

    PLANNING – Every house starts with a set of blueprints… trades should, too. My specific trades all start with entries AND exits. Typically I have limit orders on both sides, but regardless, I don’t enter a trade with the idea that I think it will go up, and I don’t wait for the market to do something first before I exit.

    EXPERIENCE – This is one thing that does get better with age. Whether you win or lose on a trade, take time to study what you did right or wrong so it becomes like breathing. That’s what we do with our Money Calendar Alert members… I venture to say many of the profits on AMZN or any other trades for that matter happened because of Knowledge, Planning, and Experience.

    And one more thing… for those of you who are patiently waiting for some slots to open up in Money Calendar Alert… I’ll have a few opening up soon. Watch your email for a message from me.

    Tom

  5. Tom:
    When these are not trade recommendations, as you say, some indication in large bold letters such as: “THIS IS NOT A TRADE RECOMMENDATION. LESSON ONLY.”; would probably be helpful.
    I too have noticed that these moves tend to mature after hours and benefit only those in markets trading outside of the U.S.
    I don’t suppose you know of a path where we can trade in these other markets after hours?

    Best Regards;

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