Trade Ideas October 29, 2020

Amazon (AMZN) Q3 Earnings Preview / Trade Ideas

by Dan

Today after the close AMZN will report is Q3 earnings. The options market is implying about a 5% one-day move, or bout $168 in either direction tomorrow which is basically inline with the average one-day post-earnings move over the last four quarters.

Shares of AMZN are up 72% on the year, up 95% from their March lows and down 10% from its all-time high made on Sept 2nd. The stock this week is approaching its uptrend from the March lows, and the implied move to the downside places the stock very near the nice round number of $3000, while the slight downtrend from the Sept 2nd high just above 3500 and the Oct 12th high just below $3500 should serve as healthy near-term technical resistance:

 

Wall Street analysts remain overwhelmingly positive on the stock despite its year-to-date outsized gains, with 53 Buy Ratings, 2 Holds, and only 1 Sell rating with an average 12-month price target of about $3730.

My friend and Fast Money guest Jared Weisefled, Tech Specialist extraordinaire from Jeffries detailed the following setup for the stock into the print in a note to clients yesterday:

Shares are +77% YTD but it’s been frustrating for many as shares have essentially been chopping around for the last three months and subject to drawdowns when the market decides to shift away from WFH into re-opening/reflation trades. But shares continue to be well owned from the perspective that even in a post-COVID world, consumer behavior has changed to benefit e-commerce and perhaps some of the recent trends are more sustainable than AMZN’s multiple would suggest.

From a guidance standpoint, AMZN guided net sales between $87.0 billion and $93.0 billion, or to grow between 24% and 33% compared with third quarter 2019 and consensus is sitting at the high-end of this range at $92.7BN. AMZN guided Operating income between $2.0 billion and $5.0 billion, compared with $3.2 billion in third quarter 2019. Consensus is sitting at the high end of the range on OI as well, at $4.5BN. As a reminder, OI guidance assumes more than $2.0 billion of costs related to COVID-19. Buyside is expecting revenue of ~$94.5BN (+35% growth vs. street +32%) , Operating Income of $4.5BN and AWS growth of 28%. Into the December quarter, buyside is expecting the midpoint of revenue range to fall in around $115BN (+32%, slightly above the street at +29%) . Given the Prime Day push, that’s a very good place to be – I’m not sure why December should decelerate by 300bps, so there’s certainly the possibility that the high-end of the Q4 guidance range captures an acceleration vs. Q3 levels. Buyside is all over the place for Q4 OI – as long as the revenue guide comes through, OI should get the pass.

So what’s the trade?

Looking at the result and reactions to stock’s like SNAP last week and PINS today I think it is important to remember that these stocks pre-results with a $30 ish billion market cap can garner double-digit rips, in both cases north of 30% in one day, I have to reiterate how utterly stupid that sort of price action is, that so many investors were discounting whatever positives were to come and the instant re-rating. It is not that common for a stock like AMZN with a market cap of about $1.6 trillion to move 10% in a day (despite the fact that AAPL did on July 30th following their FQ3 print, closing up 10.5% that day with the stock gaining another 30% over the next month!

It is safe to say that expectations are high for Q3 but presumably low for Q4 on a revenue growth basis, if the company is able to beat and raise then you could see the stock retesting the prior high in the coming weeks near 3550.

Bullish Trade Idea: AMZN ($3195) Buy Nov 3200 – 3600 Call Spread for $125

-Buy to open 1 Nov 3200 call for $170

-Sell to open 1 Nov 3600 call at $45

Break-even on Nov expiration:

Profits of up to 275 between 3325 and 3600 with max gain of 275 above 3600

Losses of up to 125 between 3200 and 3325 with max loss of 125 below 3200

Rationale: this trade idea risks ~3.75% of the stock price with a breakeven up 3.75% with a max gain of a little more than 8.6% of the stock price if it is up ~12.5% in three weeks…

 

Or if you are long the stock and more worried about a disappointment and potential downward volatility after the election than you might consider a collar, selling 1 out of the money call (per 100 shares long), and using the proceeds of that sale to help finance the purchase of a downside put, essentially limiting potential upside in the sock between now and the chosen expiration to the short call strike, but also limiting losses in the stock down to the long put strike, for instance:

vs 100 shares of AMZN long at $3195 Buy Nov 3000 – 3415 collar for even money

-Sell to open 1 Nov 3415 call at $87

-Buy to open 1 Nov 3000 put for $87

Break-even on Nov expiration:

Profits of the stock up to 3415 if the stock is 3415 or higher on Nov expiration the investor’s stock would be called away, but the investors can always buy to cover the short call to keep the long stock position intact.

Losses of the stock down to 3000, protected below. if the stock is at or below 3000 on Nov expiration the investor will need to make a decision whether they want their stock to cover the long put, so again will need to make a decision whether they want to stay long.

Rationale: an investor would collar their stock into an event like earnings, or into a period of uncertainty like the post-election days/weeks if they have gains they want to protect down to a certain point and they are more willing to give up potential gains in place of having defined risk to the downside.

 

If I thought the company would miss and offer weak guidance sending the stock through support, below 3000 then I might merely buy an at the money put in the weeklies that expire tomorrow, but this is a very binary trade, get the direction wrong by a penny on the other side of the put strike on tomorrow’s close and the trade is a total loser. With the stock around $3190 the Oct 30th weekly put is offered at about $84, or about 2.5% of the stock price. Long premium direction trades into events like earnings are a tough way to make money in the markets, for those with conviction and those risking what they are willing to lose.

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