Traders Grow Grim Toward Amazon.com As Earnings Approach ?

 Amazon.com (AMZN) has received a black eye in the media recently as the company’s Web Services unit has been down since Wednesday night, taking out a chunk of the Internet in the process. 

  While the company is slowly making progress on fixing the problem, it appears to be too late to save the mood toward the Internet retailer as traders have soured toward Amazon.com just ahead of the firm’s earnings report on Tuesday, April 26.

Analysts are expecting the company to produce a profit of 60 cents per share, which is down from the firm’s earnings of 66 cents per share for the same period a year ago.  Historically, Amazon has matched or surpassed the consensus estimate in three of the past four quarters, indicating that Amazon has a relatively strong chance of producing a positive earnings report again.

Looking at the option activity, we find that traders have a preference for puts heading into the company’s earnings report.  The out-of-the-money May 170 put has seen more than 6,000 contracts trade today on open interest of roughly 4,700 contracts, indicating that much of today’s volume represents new positions.  What’s more, the May 175 put is also home to more than 9,100 contracts, with another 871 changing hands today.  This heavy activity on the put side of the fence shows that traders have low expectations for the shares during the near term.  A positive earnings report could shake loose these bears, resulting in a sharp rally for the stock as traders jump on the security’s bandwagon.

On the other hand, the May 195 call is the site of front-month peak call open interest with more than 6,500 contracts.  This strike is roughly 10 points above the stock’s current price, leaving the security room to run higher before it might encounter potential options-related resistance at the 195 level.

Technically speaking, the shares of AMZN have been edging higher since March, but are facing former resistance in the 190 area.  This round number region has stopped the security’s rally on two other occasions and could prove to once again be a difficult hurdle to overcome.  However, a breach of this area on positive earnings news could attract more buyers, fueling a run toward the 200 level.

Meanwhile, Wall Street is mostly bullish toward the retailer.  According to Thomson/First Call, the stock has earned 13 Strong Buy ratings, 9 Buys, 12 Holds, 1 Underperform, and just 2 Sell ratings.  While there is ample room for upgrades following  a positive earnings report, the company could just has easily be hit with a slew of downgrades should the company issue negative earnings news or a less than reassuring update regarding its recent Web Service outage.

The shares of Amazon sit at an interesting crossroads.  The company is poised to benefit from the surge in popularity in e-readers.  With the steady decay of business in the brick-and-mortar book stores and the jump in popularity in e-books, Amazon stands to easily reap the profits.  This could make for a very positive earnings report.  However, the dark shadow cast by the company’s Web Services dilemma could easily leak the company announcement on Tuesday, weighing the stock down.

To take advantage of the stock’s potential for a sharp move, traders may want to consider opening a straddle position on Amazon.  With the stock sitting at approximately $185, traders should look to the stock’s May 185 call and May 185 put.  Buy purchasing both a call and a put, a trader can take advantage of a sharp move in the stock regardless of the direction.  The only way that this position is closed at a total loss is if the stock doesn’t move from the 185 level.

Disclaimer: I do not hold a financial position in the shares of Amazon.com.

source: forbes.com

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