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Tuesday, April 25, 2017

Amazon (AMZN) How to potentially profit 700% on Earnings

Amazon.com, Inc. engages in the retail sale of consumer products and subscriptions in North America and internationally. It operates through the North America, International, and Amazon Web Services (AWS) segments and has Earnings on 4.27.2017. The company’s stock is currently trading around $902.60 in a 52 week range of $599.20-$923.72. The stock has been shown on fire over the past year with shares up 44% over the past 12 months.  I think that the upside has more to come and AMZN will pop hard on Earnings. To confirm this signal we will analyze the stocks historical movement record on earnings, the current expectations for movement being priced into the options market, the technical setup, and institutional order flow into the event.
First we will examine the stocks historical earnings performance record. We can see that over the past 8 quarters the stock has rallied 5 times on earnings day with an average move of 7.1%. This does not tell us that the stock is guaranteed to rally this quarter but it does show us that there is a slight bullish bias in the performance of AMZN on earnings day. This means that as we work through the rest of our analysis will have a bullish bias.
With a sense of how the stock has moved on earnings day in the past we can calculate the expected movement for this quarter. To best isolate the expected movement in AMZN we will use the shortest dated options that still contain the catalyst event. In this case we will use the April 28th weekly expiry. To measure the market makers expected move we will need to calculate the price of the at the money straddle. We looked at the AMZN $902.50 strike straddle in the April 28th weekly expiry and it is implying a whopping $40 move.
The straddle is marking around $40.00. This implies an expected move of around $40.00. This implies a move of around 4.4% by Friday’s expiry. Since this is in line with the stocks historical movement record we know that there an opportunity to put on a good reward vs risk setup in AMZN ahead of the event With this in mind we can use the expected move to calculate targets for AMZN.
Upside target = $902.60 + $40.00 = $942.60
Downside Target = $902.60 – $40.00 = $802.60
With these targets in mind we can look at the chart in AMZN to see if trend agrees with the bullish bias in AMZN price action.

Here we can see that the stock is trading above the Ichimoku Cloud and is firmly in bullish territory. One last indication also points to the possibility for a move to the upside in AMZN.
I think that AMZN will move higher on Earnings, but I want to make sure I am getting a favorable reward to risk setup.  I think the stock will move higher, but NOT too much
Potential trade: Buying the AMZN April 21st 920-940-960 Call Butterfly for $2.50
Risk: $250 per 1 lot
Reward: $1750 per 1 lot
Breakeven: $922.50 and $957.50

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