New Income Trade in AMZN

[Steven Place]

AMZN is breaking to new all time highs and making a higher high after its earnings event. It’s also running into it’s upper 2nd std dev Bollinger Band.

This calls for a “scaling” calendar:

This is a put calendar, and if AMZN continues to squeeze higher, we’ll slowly add to the trade.

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[Jonathan Ward]

Steve,

Why wouldn’t you just with ATM options? The price is actually very close to being the same, and you don’t know which way it’s going to go. Are you anticipating a pull back after the jump higher?

Thanks.

[Jonathan Ward]

I guess you are using ATM options – there was a difference between the table you created and the graphic. Plus the IV is low for AMZN right now.

[Steven Place]

Jonathan,

I tend to bias these kinds of trades slightly to the downside. It’s a reversion play as well.

[Cody]

Steve – This is working out nicely so far, but I am curious about something. TOS is showing me that the position currently has negative theta, but we are inside the tent. It seems like theta should be positive. Do you know why this is?

[Steven Place]

Cody, we’re going to close it out today (5/27) but here’s my guess.

Analytics get a little goofy when it comes to calendars because it’s difficult to account for term structure and event risk.

In this case, AMZN has earnings in the Aug cycle… and if you look at the implied volatility difference, it’s pretty wide.

Aug options @31%

Jul options @23%

Because of this, the overall premium is much, much higher on the August options, and the analytics platform assumes that a certain amount of time decay will be taken out on each option. Since the value of Aug options is so high relative to jun, it assumes that negative theta comes into play.

I don’t think this is the case, and the premium in aug will stay bid… it’s just “goofy” analytics.

[Steven Place]

We’re closing this out for good profits here.

Now I know on the trade ticket I had two different strikes, so I’ll just put the fill prices out for both:

Sell to close AMZN Jul/Aug 690 Put Calendar @17.40

Sell to close AMZN Jul/Aug 700 Put Calendar @18.00

[Jonathan Ward]

Steven,

I see that you scaled this calendar. I didn’t ever see a need to as I started with the 700 calendar spread. I only bought 3 contracts since I anticipated needing to scale at some point as the underlying price moved up or down — but it never moved outside my initial breakevens. My current high-side breakeven is 729 with an underlying price of 713 or so. So I’m up over $800 now (which feels great), but I’m wondering about “milking” this a bit further. If AMZN moves up another $15 (or maybe less), then I would consider buying 3 contracts of the 730 calendar.

What is your thought? I like the 18% profit in a couple of weeks, but it seems like there is a lot left.

-Jon

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