Position Construction for Amazon Earnings

Key Concepts

• Double Calendar Spread: An options strategy involving selling near-term options (both calls and puts) and buying options with the same strike prices but a later expiration date. Aims to profit from time decay and limited price movement.
• Crab Spread: A neutral options strategy designed to profit from limited price movement. It involves selling two options at a higher strike price and buying one option at a further out-of-the-money strike price. Can be constructed for both upside and downside scenarios.
• Mag 7: Refers to the seven largest technology companies by market capitalization (typically Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).
• Out-of-the-Money (OTM): An option with a strike price that is not currently profitable to exercise.
• Premium: The price paid for an options contract.
• Expiration Date: The date an options contract becomes invalid.

Amazon Earnings Trade Strategies: A Detailed Overview

The video focuses on strategies for trading Amazon stock around its earnings release, acknowledging the inherent uncertainty (“crapshoot”) in predicting earnings reactions, particularly given the recent volatility observed in the “Mag 7” earnings reports. The presenter outlines two primary strategies: a double calendar spread for those with no strong directional bias, and a crab spread for those with a slight directional preference.

Double Calendar Spread for Neutral Outlook

For traders unsure of Amazon’s direction, a double calendar spread is recommended. The strategy centers around the anticipated earnings move of approximately 20 points from a stock price of $230. Specifically, the presenter suggests:

• Sell a near-term downside put at the $210 strike. This generates premium income, betting the price won’t fall below $210 in the near term.
• Sell a near-term upside call at the $250 strike. This also generates premium income, betting the price won’t rise above $250 in the near term.
• Buy corresponding options in the February cycle (further out expiration) at the $210 and $250 strikes. This provides protection against significant price movements, limiting potential losses.

The overall effect is a strategy that profits if Amazon’s price remains relatively stable around $232. The presenter notes that adding “one or two extra units” can increase potential profit, but cautions traders to monitor the premium used.

Crab Spread for Directional Bias

If a trader has a slight directional bias, a crab spread is presented as a viable option. This strategy is described as “easy to do” and offers potentially higher returns. Two variations are detailed:

Upside Crab Spread

• Strike Price: Centered around the $240 strike (10 points out-of-the-money).
• Sell two February 6 255 calls: This generates premium income, betting the price won’t rise significantly above $255.
• Buy one February 6 270 call: This limits potential losses if the price rises sharply above $255.
• Cost: The presenter states this spread can be executed for “under five bucks” for a $15 wide spread.

Downside Crab Spread

• Strike Price: Centered around the $225 strike (10 points out-of-the-money).
• Sell two February 6 210 puts: This generates premium income, betting the price won’t fall significantly below $210.
• Buy one February 6 195 put: This limits potential losses if the price falls sharply below $210.
• Cost: This spread can be executed for approximately $3, significantly less than the upside crab spread’s cost.

Comparative Analysis & Risk Management

The presenter highlights the cost difference between the upside and downside crab spreads, noting the downside spread is cheaper ($3 vs. under $5). This suggests a potentially lower risk profile for the downside strategy. A key takeaway is the importance of paying attention to the premium used in any strategy, emphasizing that increased potential profit often comes with increased risk.

Synthesis & Main Takeaways

The video provides practical options trading strategies for navigating the uncertainty surrounding Amazon’s earnings release. The double calendar spread is suitable for neutral traders, while the crab spread caters to those with a slight directional bias. The presenter emphasizes the importance of understanding the risk-reward profile of each strategy, carefully managing premium usage, and adapting the strategies based on individual risk tolerance and market conditions. The specific strike prices and expiration dates provided offer concrete examples for implementation.