[DD] My take on Amazon’s earnings and why it makes sense to write options

by Toblet

It’s no secret that Covid-19 has helped Amazon in almost every way. Practically every facet of their business has benefited, including:

  • AWS
  • Online shopping
  • Streaming service
  • Increase in prime members
  • Increase in Whole foods deliveries

Everyone. EVERYONE already knows this. That’s evident by their stock’s ytd (27%) relative to S&P’s (-13%) performance. It’s priced in. I don’t care if they beat any estimate by 10%, 30%, 50%, it will not move the stock’s price after earnings. Here’s another little known fact: Covid-19 is temporary. Whether or not it kung flu comes back in the fall is frivolous. Eventually, Covid-19 will cease to exist and people will return back to their normal lives (including Amazon). What WILL drive Amazon’s price post earnings is future guidance. How many prime subscribers do they plan on keeping? What percent of new customers can they retain? etc. This is going to be the deciding factor.

What do companies/politicians/ANY performance measured individuals consistently do in regards to predicting their future outlook? They underestimate it. This should be self explanatory. Why would you not set yourself up for greater, “unforeseen” success? Amazon is going to do just this. Keep in mind I’m not saying that Amazon is going to purposefully give themselves negative guidance, but they will not give skyrocketing guidance, either.

Options on AMZN

Amazon currently has an IV percentile of 53%. The premium on their options is very high considering they’ve reverted back to their mean, and then some. For those of you who are new to writing (selling) options, high IV is your friend. My pals would be the first to tell you that IV is overestimated by around 20%. Without getting into to much detail this means that historical volatility (i.e. realized, or ACTUAL volatility) is less than what was implied. This tells us that buyers are “overpaying” and sellers have greater odds of profitability.

During the last 6 out of 8 earnings, AMZN has only moved 4% or less. This earnings will not be much different. I’m not here to tell you if Amazon is going up or down, but I will say that it won’t have a huge movement.

I will not be giving any specific plays (I will say that I am selling a straddle later on the week when IV will most likely rise). My entire point of my post was that option sellers are going to be the winners here, while any buyers are going to get destroyed.

tl;dr sell options

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.