Amazon is due to report earnings on Thursday after the market close. The options market is pricing in a 6.7% move in either direction, allowing us to consider a bull put spread in Amazon stock.
Amazon stock has stayed above the lower end of the expected range for seven of the past eight earnings announcements.
Let's analyze how we can structure an option trade that fits the view that 1) we think Amazon stock will stay within the expected range; and 2) the response to the earnings report is likely to be positive.
Amazon Stock: The Setup
Taking the at-the-money put and call for the May 2 expiration, we can see that the expected range is 6.7%.
Now that we know the expected range, let's find a bull put spread that has a breakeven price roughly 6.7% below the stock price.
Selling the May 2-expiring 175-strike put option and buying the 170 put would create a bull put spread.
This spread traded for around $0.70 per share, based on recent price action. That means a trader selling this spread would receive $70 in option premium per set of contracts. The trade also shows a maximum risk of $430 ($5 spread minus $0.70 in premium received, multiplied by 100).
That represents a 16.3% return on risk between now and the end of the week if Amazon stock remains above 175.
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Risk Vs. Reward
If Amazon stock closes below 170 on the expiration date the trade loses the full $430.
The breakeven point for the bull put spread is 174.30, which is calculated as 175 less the $0.70 option premium per contract.
There is little room for adjustment with short-term trades such as this held over earnings. A 16% return in a few days would be nice, but the possibility of losing 100% is also very real. As such, this style of trade is only for traders with a high-risk tolerance and a bullish outlook for the stock.
Last week, we looked at a similar idea on Chipotle Mexican Grill, which expired worthless for a full profit.
According to IBD Stock Checkup, Amazon stock ranks number 12 in its group and has a Composite Rating of 85, an EPS Rating of 78 and a Relative Strength Rating of 45.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
