Pre-Earnings Analysis for AMZN

Amazon (AMZN – 299.50) will report their earnings this evening to the breathless anticipation of traders and market observers.   The consensus expectation for AMZN’s report is earnings per share (EPS) of 0.06.  Is that what AMZN stock and options traders care about?  Not exactly, they care about the reaction of AMZN’s stock price to the report.  Since that’s what they care about that’s what I’m looking at today.

AMZN reports after the market closes so the stock price reactions are for the day after the earnings report.    The table below shows the price change for AMZN in reaction to the last twelve earnings releases. AMZN Earnings Reactions

Note in April 2012 AMZN went up by over 15% based on the report and in October 2011 AMZN dropped by over 12% based on the news disseminated in their earnings release.  The average move (in terms of absolute value) is 7.11% higher or lower based on earnings.  For options traders that 7.11% is an important figure.  If bullish that would be an expectation of a price rise, if bearish it may act as the expectation of a price drop.  Also, a 7.11% move would be the expectation to use if buying or selling a straddle or strangle.  Along those lines, when AMZN was trading at 299.50 I checked the AMZN 300 Straddle that expires tomorrow after the close – the 300 Call was offered at 8.70 and the 300 Put was offered at 9.35 for a total cost of 18.05.  To break even on this trade AMZN needs to rise 17.55 to 281.95 or drop 17.55 to 281.95.  Based on that it appears around the open the market is pricing in a move of just over 6% tomorrow, just 1% under the average.  Tomorrow afternoon on the close we’ll if the option market had the magnitude of the move right or not.  The payout diagram below is based on AMZN’s pricing around the open today.

AMZN Payoff