Investors of Amazon.com, Inc. (AMZN) have kept stock prices in the fiscal second quarter announcement. At first glance, it appears that options traders are positioned for a negative move as there are more put options open than calls. The unusual options trading could trigger a strong uptrend in price action if Amazon delivers a positive earnings surprise.
A significant number of put options remain open to Amazon and option premiums are unusually high at the moment. Trading volumes indicate that traders have sold calls and bought puts in anticipation of a negative earnings report. Settling these bets could cause unexpected downward pressure on AMZN’s share price.
It is difficult to correctly predict the direction of a stock after earnings. However, a comparison between the stock’s price action and options trading shows that if AMZN delivers a positive report, the company’s stock price could rise significantly and move closer to its all-time high following the announcement. This is possible because options are priced for a downward move, but unexpectedly good news could surprise traders and cause a rapid rise in the stock price.
Key learning points
- Traders and investors have kept Amazon’s share price limited ahead of the earnings announcement.
- The stock closed just above its 20-day moving average, after falling from its recent all-time high.
- Call and put prices predict a stronger downward movement.
- The volatility-based support and resistance levels provide nearly equal movement in both directions.
- This setup creates an opportunity for traders to take advantage of an unexpected profit outcome.
By comparing the details of both stock price and option behavior, chart watchers can gain valuable insights, although it is imperative to understand the context in which this price behavior occurred. The chart below shows the price action for the AMZN stock price as of Wednesday, July 28. This created the lineup that led to the earnings announcement.
AMZN stock’s one-month trend causes the stock to climb to the top of the volatility range before falling to just above the 20-day moving average. In the past month, it is worth noting that the AMZN stock’s lowest price at the end of June was close to $3,402, while its highest share price was almost $3,773 in mid-July, a record high. The price closed in the middle region shown by the technical studies on this chart.
The surveys are formed by 20-day Keltner Channel indicators. These represent price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price moved towards a mid-range in the week before gains. This price movement of Amazon stocks implies that investors expect a negative earnings result.
The Average True Range (ATR) has become a standard tool for displaying historical volatility over time. The typical average length of time used in the calculation is 10 to 20 time periods, including two to four weeks of trading on a daily chart.
In this context, where the price trend for AMZN has fallen to a medium range, card viewers can recognize that traders and investors are expressing pessimism about profits. It is noteworthy, however, that AMZN stock price fell from its all-time high in the week before earnings before breaking above the 20-day moving average a few days before the report. That makes it important for chart watchers to determine whether or not the move reflects investors’ expectations for unfavorable earnings.
Details on options trading can provide additional context to help chart watchers form an opinion about investor expectations. Recently, options traders have favored calls over puts with more than 1.5-to-1, but the open interest on options has a slightly higher number of puts than calls. Normally, this volume suggests that investors expect a positive earnings report, but the open interest speaks otherwise.
The Keltner Channel Indicator displays a series of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Since the top lines are drawn by adding a multiple of ATR to the average and the bottom lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an excellent visualization tool when charting historical volatility .
Options traders recognize that Amazon stocks are in a midrange range and have priced their options as a bet that the stock will close within one of two boxes on the chart between today and July 30, the Friday after the earnings report is released. displayed. The green boxed box represents the prices that call option sellers are offering. It implies a 35% chance that Amazon stocks will close in this range by the end of the week as prices move higher. The red box represented the pricing for put options with a 33% probability if prices move lower at the time of the announcement.
It is important to note that open interest contained more than 439,000 active call options compared to approximately 459,000 put options, demonstrating the bias that option buyers had as the small majority of trades were put options. This amount normally implies that put option traders expect a price drop. However, because the call box and put box are relatively the same size, it tells us that the higher percentage of put options traded has only slightly skewed expectations. A much more complacent view is implied.
The purple lines on the chart were generated by a 10-day Keltner Channel survey set at four times the ATR. This measure tends to create highly correlated regions with strong support and resistance in the price action. These regions appear when the channel lines have made a noticeable turn in the past three months.
The levels at which the bend marker is located are annotated in the table below. What stands out in this chart is that the call and put prices are so close together with plenty of room to run down or up. This suggests that option buyers do not have strong convictions about how the company will report, even if puts are bought through calls. While investors and options traders don’t expect it, a surprising report could push prices up or down dramatically.
These support and resistance levels show a wide range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will surprise investors and generate an unusually large move. After the previous earnings announcement, AMZN shares fell less than 1% on earnings day and continued to fall the following week. Investors may expect a similar movement in the price after this announcement. With enough room in the volatility range, stock prices could rise or fall more than expected.
As a leading stock, Amazon’s earnings can have a significant impact on index and stock prices. Whatever the report says, it is likely to impact stocks in the consumer discretionary sector and even the technology sector.
Amazon is one of the largest stocks in the world and one of the most heavily weighted stocks in many exchange-traded funds (ETFs). Amazon’s revenue is critical to the health of the market. A positive report could boost major ETFs such as State Street’s Consumer Discretionary Sector ETF (XLY), State Street’s S&P 500 Index ETF (SPY), or Invesco’s QQQ Trust ETF (QQQ). Similarly, if Amazon reports positive results, it could boost other stocks in the sector such as Alibaba Group Holding Limited (BABA), The Home Depot, Inc. (HD) or Nike, Inc. (NKE).