Thoughts of a mechanical engineer turned programmer turned statistical investor. Here to save you from making mistakes I made at the beginning of my investing career.

AMZN earnings trade – follow up

The original post, with details and explanation, is quoted at the bottom, scroll down to refresh yourself if you need.

Theres nothing like AMZN reporting and dropping 15% to mess up a bullish (even if only slightly) earnings play on AMZN. But lets go over what actually happened:

This was the earnings trade, and filled for a 2300$ credit:

To close the position today, this would be the order:

So 6500$ debit against the 2300$ initial credit, for a loss of 4200$.

Definitely not a “successful” play, at least in the immediate meaning of success, but lets look at what actually happened here.

With AMZN trading at 2450$, even if it stays at this level (ie doesn’t go back up at all from here in the next month), the position will expire worth 5000$, add to that the original 2300$ credit I received and the play turns into a massively successful play, 7300$ worth of success, to be precise. If AMZN does go up a bit from here, the 5000$ could go as high as 10000$ credit, if the position expires in a month with AMZN exactly at 2500$ (although unlikely to say the least).

So the reason the position lost so much money in the immediate frame is that AMZN dropped 15% the day after the position was opened, on a 21 day position. What remains is purely time premium, and since it seems unlikely that AMZN will drop a lot more from here without a major catalyst such as earnings, it makes sense just to wait it out to see how the next 3 weeks play out in the market.

Aside from thinking of the positive outcomes, it is however important to think of the worse outcomes as well, and what you will do should they materialize.

So the break even for this position assuming I leave it as is is 2380$, so as long as AMZN goes down less than another 70$ from here the position will expire neutral. If it does go down lower, the play would be to take the 10k$ profit on the 2600-2500 bear put spread, netting in 12,300$ realized gains on the position, and then roll the 2500$ put out (and down if you want) into the future. Currently it can be rolled to a 1800$ June 2024 (so another 600$ or 25% lower than it is today) for a further credit of 2700$:

From there, all that would remain to do is wait 2 years to go by, and then assuming AMZN didn’t go down ANOTHER 25% from here (!!!), the whole earnings play would have returned a total of 2300$ (initial credit) + 10k$ (the BPS) + 2700$ (the roll credit) = $15,000 over 2 years, which comes out to a 25% return on the 60k$ margin requirement of the short puts (over the 2 years), on a stock which went down (!!!) 15-35% during that time, or outperformance vs buying AMZN stock of >40%.

Looking at the 2.5 year graph of AMZN, however, which includes the March 2020 covid scare drawdown, seems to suggest that such an extended drawdown is unlikely:

So overall I would say the position is “on track” for now, and we’ll leave it to see what happens next week and in the continuation of the month.

Hab Technology

With amzn trading at 2800, implied volatility at 46%, the vix at 30, and earnings this evening, it’s time to do a conservative earnings trade on them.

In the past year whenever AMZN neared the 2800 line it popped back up:

So a it’s possible to do a very (!) conservative ratio spread for a net 2350$ credit:

So it’s a 2600-2500$ out ratio spread, meaning than above 2500$ the position will expire worthless, netting me the initial credit of 2350$. If expires below 2600$, the put spread will be worth up to 10k$ (in addition to the 2350$ initial credit). And the break even is 2380$, so 18% below where they are today, which is 25% off their highs of 3700$.

Realistically, the outcome of this position will be “just” making 2350$, but there is a slight possibility of making more. And if Amzn tanks to 2000$, I consider…

View original post 46 more words

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