Scaling Calendars in AMZN

[Steven Place]

The stock is up big on earnings and is having it’s 2nd day move. Implied volatility has collapsed as well.

The trade here is to pick up some calendars, expecting a new range to get knocked out and for IV to (hopefully) not fall that much.

Here’s the trade

Buy to open AMZN Mar/Apr 360 put calendar for 3.60

We will ADD to the trade if AMZN runs to 380 or 340.

[Steven Place]

AMZN is hitting 378 so that’s close enough for the next add.

Buy to open AMZN Mar/Apr 375 put calendar @ 4.23 or lower

This moves our breakevens to 346 and 390 (although those breakevens will tighten up if the IV falls).

Next add on another 20 point move higher.

[Steven Place]

We’re close enough to the upper side of our risk to add.

What you should notice here is that the opex breakeven has tightened up from 391 or so into about 387. That’s because the implied volatility is continuing to fall, which “collapses” the tent a little bit. This is a known risk.

The next trade here is to add some call calendars. I’m biasing this round a little higher since I want all calendars to be equidistant from one another.

Buy to open AMZN Mar/Apr 390 call calendar @4.38

This will cut delta by 50%

raise theta by 60%

raise vega by 50%

and basically double the short gamma.

Breakevens are now 354 and 397.

So what now?

What happens if AMZN continues to rip higher? Not fun, right?

Honestly, it’s quite possible.

The simplest thing to do after that will be to close the 360 calendar and use some of that capital to buy some bull call spreads to hedge the deltas off.

For a past example, check out this triple calendar trade in AAPL from last year.

[Steven Place]

The time decay has really come in on the near term options. We didn’t get a ton of return here because the implied volatility kept heading lower.

It’s time to bail because of the upside risk relative to the potential rewards we could get further.

Sell to close AMZN Mar/Apr 360 put calendar for 3.28

Sell to close AMZN Mar/Apr 375 put calendar for 4.95

Sell to close AMZN Mar/Apr 390 call calendar for 5.53

[Author]

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