Earnings season is upon us and the largest company in the world - Amazon (AMZN) - is reporting on Thursday, July 30th. Earnings are usually somewhat predictable (keyword: somewhat). We can typically expect companies to be in a certain range under normal circumstances, but the fallout of Covid gives us a highly volatile market - especially around company reports.
Amazon is an interesting company to watch in a Covid environment. While many small businesses and even massive retailers have gone out of business/filed bankruptcy because of the incredibly disruptive impact of Covid, tech-centric companies like Amazon are actually thriving.
With stay-at-home orders lasting in many places for over 2 months, people who didn't previously shop online (or who perhaps shopped online infrequently) began shopping online like never before. In my personal opinion, we've seen an acceleration in the advent of online shopping. For the younger generations, this had already become a staple of day-to-day life. For older generations, this is something that had to be embraced because of Covid.
"it will be interesting to see if the company provides any updates on its Amazon Prime member totals. The most recent update was in January when the company announced it reached the 150-million member milestone. As of the end of 2019, 65% of shoppers were Prime members. Given the number of people who are turning to Amazon to reduce trips to stores, it would not be surprising for Amazon to announce a significant increase in Prime members." - Motley
One major aspect of AMZN's business model that I expect to be thriving is their number of prime membership subscribers. I've been a subscriber for longer than I can remember, but as I said earlier: there are many who have been slow to transition to online shopping. Covid has changed this drastically and I expect Amazon's reports to reflect that.
"Finally, investors should look at the update in its Amazon Web Services (AWS) segment. That's because even though the segment generated 13.5% of revenue in its most recent quarter, it made up 77% of total operating profit. With many retailers accelerating digital transformations, AWS may have experienced an increase in sales as a result." - Motley
AWS is one of the primary drivers of Amazon's profits. With a growing need for businesses to go online, I believe that we'll see a spike in usage for the world's largest provider of cloud computing services.
How I'm Trading AMZN's Earnings
"The only thing that appears to be certain is volatility." - Motley
I'm not Nostradamus and nobody else is either. I don't know what Amazon's earnings will look like and I sure as hell have no idea what their stock price is going to do come Thursday.
Given that, here's how I've positioned my portfolio for an earnings play:
Iron Condor:
- Put Spread: Sold the $2645. Bought the $2635
- Call Spread: Sold the $3550. Bought the $3560
- Total Credit Received: $264
- Risk: $736
- Profit Target: $158
- Exp Date: 8/21
For all of my options trades, I'm targeting 40% of the max profit (total credit received). So on this trade I expect to make $158 or ~21% ROC (return on capital). I'll also close out this trade the same way I entered it: 1 leg at a time. So when the call spread is profitable, I'll close the call spread. When the put spread is profitable, I'll close the put spread.
We can expect a large move in either direction on Thursday, so one of the spreads will hit that 40% profit target and will close and then I'll hang on to the other spread and allow theta decay to work it's magic and let the option's price decay over time and bring me back to my profit level so I can close out that leg of the trade.
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