Thursday, April 24, 2014 (AMZN) - Earnings Preview: Here's What the Option Market Reads About the One-day Move. Do You Agree?

AMZN is trading $334.86, up 3.2% small with IV30™ up 1.4%. The Symbol Summary is included below.

Provided by Livevol

This is a pre-earnings note. To read any of the prior notes for this quarter, you can click the titles below.

Prior earnings notes
3D Systems (DDD) - Earnings Preview: How Much Risk Do You See in 3-D?

Facebook (FB): Earnings Preview: Option Market Reads: "Oh, yeah, that's happening..."

Apple (AAPL) - Earnings Preview: An Astonishing and Unprecedented Phenomenon is Happening Right Now.

Microsoft (MSFT) - Earnings Preview: Cash Rich, Dividend Payer, Stock Up 50%... What Now?

Netflix (NFLX) - Earnings Preview: My Bologna Has a First Name: c.o.m.p.e.t.i.t.i.o.n.; A Reckoning is Coming with Earnings.

Illumina (ILMN) - Volatility Explodes to Multi-year Highs Ahead of Earnings. Skew Reverse; Bends Backwards.

Google (GOOG) - Earnings Preview: Highest Risk in Nearly 2-years. A Market Moving Event.

Back to today and AMZN.

Let's start with the Charts Tab (two-years), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

AMZN's stock movement has been very similar (i.e. highly correlated) to that of the rest of the momentum stocks. Interestingly, AMZN is considered a MOMO stock yet its market cap is over $150B.  It's actually a new phenomenon that has occurred in this version of a US bull market.  The same goes for FB -- a MOMO stock that is in fact a Mega Cap.

What's of greatest interest in the stock portion is the recent drop in value and then, the recent recovery.  I think we're all wondering (and opining) if this is a bull trap, a bear trap, or no trap.

Let's drop the evergreen discussion or now and focus just on AMZN today and earnings after the bell.  That means we need to look at the IV30™ chart in isolation, below (same two-year period).

Provided by Livevol

We can see how much more risk was reflected by the option market six and seven quarters ago into earnings (the blue "E" icons represent earnings dates).  We can also see that since those spikes, the option market has found a rather stable equilibrium with respect to how risk is priced into these events.

The chart below has the same information as the above, but focuses myopically on the earnings dates.  Let's take a look.

Provided by Livevol

I've boxed those last four earnings cycles and today.  We can see that there is a reasonable range that has been held and today's level of risk (implied volatility) fits very much into the last year's risk profile.  As to whether that's appropriate or not... I dunno.  So far, based on the pre-earnings notes on the other firms I watch (above), the option market has been hit and miss -- which really means, right on the money.  AAPL risk was dead wrong (too low), NFLX was dead right,  FB was overpriced (too high).

In other words, I see no compelling evidence on a broader view that the option market is somehow a drunken sailor.  but, for each company, we do need to look more carefully.  Let's do that for AMZN starting with the Skew Tab snap (below).

Provided by Livevol

I note a parabolic skew, but one that is not even.  There is greater downside risk reflected by the option market than upside.  That's not terribly surprising, but it is different than a few of the names I have covered.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

When it comes down to it, we need to put numbers to the volatility in terms of dollars so, finally, the Options Tab is included below.

Provided by Livevol

The option market is pricing a range of [$313, $357] by April 25th, aka tomorrow.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

What am I doing?...

I'm not convinced the move off of earnings will be this small, but I'm not so unconvinced that I would enter a naked long option position.

This is trade analysis, not a recommendation.

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