How to Play Today’s AMZN Earnings Announcement

In light of Wal-Mart Stores Inc.‘s (NYSE:WMT) bombshell announcement that it’s expecting a 6% to 12% earnings cut over the next two years, expectations are high for Inc. (NASDAQ:AMZN), which reports earnings after the bell today.

The volatility I’m seeing with AMZN shares tells me traders are afraid Amazon might not deliver on earnings.

It’s always difficult to predict which direction a stock will break around earnings. The slightest bit of news could send a stock soaring… or crashing.

Last week, I showed you how to construct a Straddle, a non-directional trade that’s perfect for when you can’t tell which way a stock is going to move.

Ahead of earnings – and all the uncertainty and volatility that comes with it – is AMZN a ripe for a straddle?

Let’s take a look…

The Chart That Only 1% of Traders Ever See

The stock chart below is a great read for straddle traders – it shows Amazon’s share price, along with the result of the last earnings report back in late July, but it shows something else as well…


The blue line you see moving up and down, that’s not a moving average, or any popular technical indicator. That line is the implied volatility for the near-money options that trade on Amazon, and it’s really rare, valuable data.

Here’s what it means for us.

I like to call this line the “fear factor” line. As the line goes down, there is less fear of the day-to-day movement of the stock. As the line goes up, so does the uncertainty about the future, and of course, options prices.

For Amazon, the options implied volatility trades in a range of 20 to 80. If the line goes from 20 to 80, it basically means that an options time value theoretically increases by a factor of four.

Now a smart straddle trader would try and buy when volatility is low and sell when volatility is high.

In hindsight, buying a straddle a few weeks ago would have made a lot of sense – option volatility has actually risen with price.

Most novice traders actually think buying a straddle and holding it through earnings makes sense, because they have seen big moves happen on the stock, and have the idea that a trade like a straddle will make money on the big move.

But it’s not as easy as it sounds, so let’s take a more experienced approach to see if this indeed is a good idea ahead of this week’s earnings on AMZN.

First, let’s create an outlook for this week’s Amazon earnings. Even though most people know that Amazon has met or beat expectations in three of the last four quarters, I am more interested in what the stock did before and after earnings…

So in the week leading up to earnings the last four times Amazon reported, we saw an average share-price move of 4.18%, mainly to the upside. This was before earnings, but not through earnings.

Now, in the days following earnings, AMZN stock moved an average of 15.31% with three out of the four quarters moving higher by double digits.

Put these two spreadsheets together and you are talking an average 20% move to the upside on the stock, in three of the last four quarters.

AMZN: Here’s How We’ll Play It

First it makes sense to actually look at the near options expiring this week. This gives us a gauge of how far the stock could go just after the report.


As of earlier this week, AMZN October 15 2015 $570 (AMZN151015C00570000) calls and AMZN October 15 2015 $570 (AMZN151015P00570000) puts expiring this week are trading at around $50 when combining the costs together. That’s what I like to do to get a read on where this stock might go after earnings. We want to see the range right around $50.

Now we have to consider the likelihood that Amazon stock will head higher after earnings. I think the shares have a 75% chance of heading higher, against a 25% chance of heading lower.

But this does not – repeat, not – mean we should go for a straddle…

First, the straddle above would cost $5,000 per contract to buy, which already violates a major rule for me. Next, buying a straddle and holding it through earnings will stack the odds against you.

Buying a straight call option puts you a bit further into probability’s favor, but only just – and before the probability traders our there start writing angry comments, remember there are two kinds of probability that concern us here:

Statistical probability – with options, when you bet on the long shot, you could win more, but of course the odds of winning becomes far less.  Don’t let the probability calculators fool you into thinking that naked options selling is the only way to trade, it’s just a guide and should be treated as such.

Remember Long Term Capital Management? They used to be a big name, just like Tyrannosaurus Rex and the dodo. Well, LTCM’s Myron Scholes helped create the Black-Scholes Option Pricing Model that most calculators are based on – before the company went bankrupt trading on the theory and almost scuttled the American economy back in the 1990s.

We are banking on historical probability for this trade. While not perfect, it’s the lifeblood of a Rules-Based Trader. Follow the pattern. And the pattern here suggests we do something bullish.

So what’s the best way to play AMZN this earnings season?

The “loophole trade” offers the least risk, most reward, and best probability for option buyers.

Creating a short-term bullish loophole trade that expires this week makes sense to those who believe AMZN could pop $50 by Friday. Here are a few examples of where some spreads are right now using AMZN October Week 4 options:


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

Now, don’t let the colors scare you, I did this to point out three different examples that suit the risk tolerance of most investors.

The green highlighted option has the highest risk, but the lowest breakeven point at Friday’s close.

The yellow in the middle has lower risk and higher reward, but a higher breakeven.

And the red highlighted option offers the lowest risk and highest reward. Nothing is guaranteed, of course, but any one of these strategies will get you paid handsomely when’s expected post-earnings breakout takes shape.

Here’s your trading lesson summary:

A non-directional options trade, such as a straddle, is often a good way to play an earnings announcement. Is today’s earnings announcement the right time to straddle AMZN?

  1. Implied Volatility is a great indicator to use if you want to build a straddle – a smart straddler buys when volatility is low and sells when volatility is high.
  2. Look at the historical data – such as the stock’s behavior following the last several earnings reports.
  3. Research the cost of short-term at-the-money options and see if they align with your personal risk tolerances and trade plan.

Good trading,


19 Responses to “How to Play Today’s AMZN Earnings Announcement”

  1. Took out a Vertical Spread 560/562.5 @ 1.26 on 20th after reading that Amazon have contracted a few thousand temporary staff to cater for the predicted increase in sales over the holiday period but have also heard that the market is expecting a loss this quarter. Friday will tell.

  2. Tom:

    The Trading Lesson Summary appears to have been inadvertently left off.
    Also when you discuss the ROI in this example, we are already starting with 100% in our initial investment are we not? So that said, the green band ROI is really 27%, Yellow = 180% and, Red = 240%. Right? Or did I make a pre-coffee math error?
    Always willing to learn from the Master.
    Best Regards;
    D. Wilson

  3. Should straddles, if they move enough to change in value, always profit the trader? My understanding from what is written above is that as long as the stock moves sufficiently, either up or down, the trader will profit. There must be something I misunderstood because I tried a straddle with PCLN (b/c the APPL straddles were not moving enough) and currently, the “call” portion is losing $1,172.50, and the “put” portion is only up $650.00. Obviously, that would result in a net loss. My understanding of the whole purpose of the “straddle” was to profit regardless of whether the stock price goes up or down. The strike price on the straddle was 1365, which is lower than its current value, but again, that should not matter. Could you please explain what you think may have gone wrong here so that I, or another trader, does not repeat this error? Thank you!

  4. The majority of earnings strategies work best when exiting shortly after the earnings report, meaning first thing the following morning. Sometimes its best to wait a few minutes for the traffic jam of volatility that comes at the opening bell, than simply reversing the position to close it. Obviously each spread presented in the earlier article will yield a different result.

  5. Michael, you need to re-read the article… I said it was NOT worth buying a straddle on, and that the loophole spread was the best strategy for this stock going into earnings… This straddle was simply too expensive, both in price and option volatility…

  6. Saw where the stock hit $630 after hours. That was just swell, for the ASIAN MARKET!!
    Stock retracted, tanking the position right out of the start gate when the American Markets opened. Blew the stops off for a lovely bath. Currently the stock is struggling to hold 600.
    Gee, sure would be nice to get to trade Options around the clock. Seems that there is, in many cases, better market play after hours.

  7. I realize this was some what of a risky trade but I would think it would have yielded a profit, since the stock did trade much higher by close. I am unable to sit at the computer all day so by the time I got into this trade I was down. In most of your trades you provide more information as to an exit plan.

  8. Thanks for all the comments on this article… As you can see based on the price action of AMZN in the last 24 hours, it was quite a ride for stock and options traders. Also, to be clear… this was not a specific trade recommendation. If it were, it would have come with specific actionable entry AND exit instructions, as we do with The Money Calendar, and would come to you in real time. That being said, the difference between getting out shortly after the open this morning vs later in the day had big differences in the option prices.

    I will have a detailed Post Earnings article on Tuesday to discuss price details, the need of limit orders, and a way to exit this trade you may not have thought of…

    Till then,


  9. Tom,
    How did you calculate a max reward of 14 on the 575/625 spread? Shouldn’t that be 39? Also, it would be nice to see a stock price break even point column in the table. How do you calculate b/e? Is it just the lower strike plus the cost?


  10. Todays trade in amzn was an expensive lesson and this hasn’t been the first one. With the price of your service and the loses along the way I will be working for minimum wage unless I can turn things around. We need more just call and put options.

  11. Thanks for all the comments, and be on the lookout for my post earnings article tomorrow. From the charts all those spreads more than doubled off the open Friday before the stock dropped, with lots of volume in all the contracts in the first 30 minutes of the day. Buy the Rumor, Sell the News is especially true for trading around earnings. Remember this, the short term your outlook is, the more attention you need to pay to the trade.

    BTW David, you are right, my goof on that spreadsheet. It was 39… The post article tomorrow will show this… plus updated prices, risks, rewards, from Thursday to Friday, as well as what happened to the spreads in the first 30 minutes of Friday.

  12. Mike F / Pittsburgh

    I read through your AMZN presentation, and at 80 years of age, came away OVER-WHELMED : What does he want me to do ? All these OPTIONS, and no concrete RECOMMENDATION from the GURU I hired to guide me, I’m not looking to be 20+ trader / user of all kinds of options, I’m over-whelmed, now by all the blather that several of your contemparies throw at me every day, sometimes with a recommendation buried somewhere in all the dialogue, and many times just a bunch of hot air, like they need to be in front of me daily justifying their fee, even if they don’t have anything to recommend, I ENDED UP doing NOTHING WITH AMZN and have NOT gotten in on a number of your recs. since joining as they were already over-priced. HOPING for some winners down the line MGF

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