Editor’s Note: It’s the first day of the fourth quarter – meaning Q3 earnings season is coming up. Here’s how you can use volume to trade company reports for profits.
Amazon Prime Day, or should I say “days,” is set for October 13-14 – and if you’re like me (or my wife), you’re chomping at the bit.
For 48 hours, products will be offered at mind-blowing discounts. And suddenly, items that you’d never buy, like a portable French Press or a kneading Shiatsu Massager, become irresistible bargains.
Forget Black Friday and Cyber Monday. Amazon Prime Day dwarfs any bargain event the planet has ever seen.
Launched on July 15, 2015, the days of discounts have driven billions of short-term dollars into Amazon’s pockets and contributed to the online ecommerce giant’s meteoric rise. Last year alone, Prime Day sales hit an estimated $7.16 billion.
And just like anything that comes around once a year, there’s a pattern at stake – a profitable one, at that.
In fact, this 10-day pattern could help pay for your Prime Day purchases before you even buy them…
How to Turn Amazon’s Most Profitable Day into a 10-Day Profit
Back when Amazon.com Inc. (NASDAQ: AMZN) first launched Prime Day on July 15, 2015, the retailer promised that it would be one of the biggest deals extravaganzas that the world had ever seen.
And they delivered.
In just 24 hours of deals for Prime members across numerous countries, 34.4 million items were sold, culminating in the biggest sales day in Amazon’s history. NBC News estimated sales of $900,000 during this 24-hour period.
Of course, with sales numbers like that, Amazon decided to make Prime Day an annual event. And each year, estimated sales have increased exponentially:
2016: $1.5 billion
2017: $2.4 billion
2018: $4.2 billion
2019: $7.2 billion
What used to be just one day of sales has grown as well. In 2017, Amazon increased the duration of Prime Day to 30 hours. In 2018, it was 36 hours. And last year, for the first time in history, Prime Day took place over the course of two full days.
Since launching Prime Day in 2015, shares of Amazon have risen from $461.19 to an all-time high of $3,552.25 on September 2, 2020 – a whopping 670% increase. And the company has more than just their annual Prime Day to thank.
Most recently, Amazon has benefited from “stay-at-home” shopping that has driven the stock up over 100% since bottoming on March 16.
With a market cap of $1.575 trillion, Amazon is now the second-largest company in the U.S. behind Apple Inc. (NASDAQ: AAPL), which has a market cap of $1.98 trillion.
This year, Prime Day was postponed to October 13-14 due to the COVID-19 pandemic. And you know me – I’m always looking for profit-generating patterns. With Prime Day just a few weeks away, here’s what I found:
AMZN runs up an average of 3.42% the 10 days prior to Prime Day.
Now that’s something we can trade. With Prime Day set to begin on October 13, we have everything we need to trade this pattern.
Entry date: October 2, 2020 (10 days prior is a Saturday, so we’re entering one day earlier)
Exit date: October 13, 2020
Now, if you want to make about 3.42%, then you can buy and sell the stock on the above dates. If history repeats, you can expect a modest 10-day return.
But I have two problems with this:
- Amazon’s stock price is around $3,100 per share.
- 3.42% ROI is peanuts.
Now, with options, we can slash our entry cost (risk) and dramatically increase our returns – even if Amazon doesn’t completely reach a 3.42% run up. Let’s take a look at call options, which profit should the underlying stock rise…
At approximately $3,100 a share, AMZN should run up just under $100 at a 3.42% increase. But let’s be conservative and say that the stock will run up half that, or $50.
Adding $50 to the current stock price gives us a strike price that will be fully in-the-money (ITM) and very profitable 10 days following entry. Buying a call with a strike price $50 higher than the current stock price greatly reduces the cost – and increases the potential ROI.
Today, an AMZN Oct 9, 2020 $3,200 Call will cost $60.50, or $6,050 per contract. Now, although much cheaper than 100 shares of the stock, $6K is still a lot of money to put at risk. But we can reduce our risk and maintain a high ROI by selling a higher strike call as well, turning the trade into a long call spread.
Buy Oct 9, 2020 $3,200 Call $60.50
Sell Oct 9, 2020 $3,205 Call $58.50
Total Cost: $2.00
For 100 shares controlled, that’s only $200 per spread. This trade has a maximum profit of $300 and a maximum ROI of 150%.
Now, that’s obviously much higher than the 3.42% you can expect to make on a stock purchase – and for a fraction of the cost.
In summary, on October 2, 2020, here’s the spread you’ll want to build:
- Use October 16, 2020 Expiration
- Buy Call Strike $50 Higher Than Stock Price
- Sell Call Strike $5 Higher Than Purchased Call Strike (5-point spread)
Then, all you have to do is wait. 10 days later, on October 13, 2020, when the pattern is over and Prime Day begins, sell your trade. If history repeats, you can expect to make a double or more.
Patterns like these occur over the course of the entire year – not just around Amazon Prime Day.
In fact, some of the best patterns occur around earnings season. And as the third quarter comes to a close, our next round of earnings is coming up.
To learn how you can receive detailed trade recommendations on company earnings reports this quarter, click here.
Good trading,
Tom Gentile
