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Althea Spinozzi
Head of Fixed Income Strategy
Investment and Options Strategist
Summary: This article explores options trading strategies for Amazon (AMZN) earnings, focusing on diagonal call spreads, iron condors, and diagonal put spreads to capitalize on the expected volatility crush post-earnings. Each strategy is tailored to different market outlooks, providing structured ways to manage risk and maximize potential returns.
Amazon (AMZN) remains one of the most influential companies globally, with its earnings reports closely watched by investors and traders. These reports can cause significant stock movements, providing both opportunities and risks for options traders. This article will explore several options trading strategies designed to capitalize on the volatility crush that typically follows an earnings announcement.
Amazon (AMZN) is set to release its earnings report tomorrow night, and there are several key expectations driving market sentiment.
Analysts expect Amazon to report earnings of $1.03 per share, representing a year-over-year increase of 63.49%. The focus will be on Amazon Web Services (AWS) and the North American e-commerce segment. AWS is expected to grow by at least 18%, driven by its strong positioning in the generative AI space. Additionally, Amazon's recent Prime Day event saw double-digit growth in sales, which could positively impact the quarterly results.
Before diving into specific trades, it's important to consider the expected move, which helps determine the strike prices for our options strategies. Based on the current option pricing, the expected move for Amazon's stock is approximately $11.73. This means we'll set our short strikes at plus or minus $12 from the current stock price. Keep in mind that expected moves are far from a guarantee; they are only a statistical indication based on option pricing.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
When adopting a bullish outlook on Amazon (AMZN), several options strategies can take advantage of the current high implied volatility to maximize potential returns. Here are a few strategies that fit this view:
While there are several bullish strategies, we will focus on the diagonal call spread, which provides a balanced approach to profiting from a moderate rise in Amazon's stock price while taking advantage of the volatility crush. For more information on time spreads, including diagonal spreads, you can listen to our podcast episode on mastering time spreads.
The diagonal call spread involves buying a longer-term call option and selling a shorter-term call option at a higher strike price. This strategy is designed to benefit from both a moderate increase in Amazon's stock price and the expected volatility crush following the earnings announcement.
Example trade:
The provided screenshots show the setup and the potential profit/loss diagram for this trade.
Trade details:
Advantages:
This strategy is ideal for traders expecting a moderate increase in Amazon’s stock price following the earnings report, while also looking to take advantage of the volatility crush that typically occurs after the announcement.
When expecting Amazon (AMZN) to remain within a specific range following its earnings report, several options strategies can take advantage of the current high implied volatility to maximize potential returns. Here are a few strategies that fit this view:
While there are several neutral strategies, we will focus on the iron condor, which provides a balanced approach to profiting from a range-bound stock price while taking advantage of the volatility crush.
The iron condor involves selling an out-of-the-money call and put while buying further out-of-the-money call and put options for protection. This strategy is designed to benefit from Amazon's stock remaining within a specific range and the expected volatility crush following the earnings announcement.
Example trade:
The provided screenshot shows the setup and the potential profit/loss diagram for this trade.
Trade details:
Advantages:
This strategy is ideal for traders expecting Amazon's stock to remain within a specific range following the earnings report, while also looking to take advantage of the volatility crush that typically occurs after the announcement.
When adopting a bearish outlook on Amazon (AMZN), several options strategies can take advantage of the current high implied volatility to maximize potential returns. Here are a few strategies that fit this view:
While there are several bearish strategies, we will focus on the diagonal put spread, which provides a balanced approach to profiting from a moderate decline in Amazon's stock price while taking advantage of the volatility crush. For more information on time spreads, including diagonal spreads, you can listen to our podcast episode on mastering time spreads.
The diagonal put spread involves buying a longer-term put option and selling a shorter-term put option at a lower strike price. This strategy is designed to benefit from both a moderate decrease in Amazon's stock price and the expected volatility crush following the earnings announcement.
Example trade:
The provided screenshots show the setup and the potential profit/loss diagram for this trade.
Trade details:
Advantages:
This strategy is ideal for traders expecting a moderate decrease in Amazon’s stock price following the earnings report, while also looking to take advantage of the volatility crush that typically occurs after the announcement.
Trading Amazon’s earnings with options strategies like diagonal call spreads, iron condors, and diagonal put spreads allows traders to capitalize on the expected volatility crush post-earnings. These trades offer a balanced approach to profiting from various market outlooks, leveraging the decline in implied volatility and providing structured ways to manage risk.
Bullish strategy: The diagonal call spread profits from a moderate increase in Amazon’s stock price and benefits from the volatility crush, with defined risks and potential rewards.
Neutral strategy: The iron condor takes advantage of a range-bound stock price, generating premium income and benefiting from the expected volatility decline, while maintaining limited risk.
Bearish strategy: The diagonal put spread allows traders to profit from a moderate decline in Amazon’s stock price, also leveraging the volatility crush and offering a cost-efficient approach compared to outright puts.
In all these strategies, the key is to understand the potential impact of the volatility crush and to choose the appropriate strikes and expiries based on the expected move. By doing so, traders can effectively manage risks and maximize potential returns.
These strategies are designed to provide a structured way to trade Amazon's earnings, considering both market expectations and volatility dynamics. As always, it's crucial to align trades with individual market outlooks and risk tolerance levels.
Happy trading!