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Thursday, January 27, 2011

How to play AMZN earnings

AMZN earnings report are due today at 4pm. After that time, and probably more obvious tomorrow, volatility in the front month options will come down from the astronomic levels they are in and this will be reflected in those options losing value. Let's check out an opportunity to short those options.

This play is very similar to the NFXL earnings play. By the way, not because volatility in the front month will go down you have to always short those options, don't get me wrong. Above all, you have to create a profit picture and if you like the profit range (the wider the better) and if you like your risk/reward ratio, then go for it. Doesn't mean you have to blindly short front month options whenever earnings are due. If one thing is for sure here is that there are no freebies, there are no easy cakes in the market and let alone, blind bets that work 100% of the time.

So, here are the numbers:

First notice the elevated volatility in the January4 2011 Weeklies versus that of February:
Click on Image to enlarge

Second, the Double Calendar position filled using the 165 PUTS and 185 CALLS:
Click on Image to enlarge

Finally the profit picture obtained:
Click on Image to enlarge

In the next two days AMZN can move between 155.82 and 196.54 and this position is still profitable. As of this writing AMZN is trading at 176.80 during After Hours session.

POTENTIAL PROFIT: up to a little above $5100

Stay tuned!

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