Amazon ($AMZN) reports earnings on January 31, and this is an Amazon Earnings Trade. Although $AMZN just hit all-time highs yesterday, it’s still a wild card – Earnings could be a hit or miss. Under these circumstances, it’s best not to take a directional bet. The Feb series has seen Volatility expanding to 40 already, and I think its reasonable to assume it will increase further leading upto the earnings event, which is still over 3 weeks away.
Trade and Rationale –
AMZN Straddle at 265 Feb Series, opened yesterday at 27/share (total for Calls and Puts)
10 Contracts, 38 days to expiry, Debit- $27000
Its a Vega positive trade, so the trade will benefit from an increase in Volatility between now and Jan 31.
Non-directional so we don’t care which way AMZN moves.
Given its recent activity, its possible (small chance) that AMZN may move $27 before the event
I want to watch for the Volatility because it may happen that a Weekly series may interfere with the Monthly series, in which case we could see a Volatility crush in the Monthly series.
EXIT CRITERIA (VERY IMPORTANT)
We have to exit this trade ON OR BEFORE Jan 31. This is so that we can avoid the Volatility Crush after the event.
1. Theta would probably increase cutting down your profit more and more each day.
2. Delta + Gamma may change the game from non-directional to directional.
3. I suggest selling an Iron Condor just before earnings. Set the wings based on the price of the at the money straddle and keep at most an absolute delta of 0.1 at the short options. This way you are exposed for only one day selling high IV and buying it back in a lower price.