Another very high-risk earnings trade

Good morning and welcome back to the office, where they put the off in ice and the ice after off.

Anyway, it started out as a slightly higher market and it’s faded into a slightly lower market. I’d like to see a 2-3% pullback to start scaling more aggressively into a net-longer stance than I have right now and this kind of action can lead us there. Let the pitches come and don’t be in a rush if and when the markets start to crack.

Speaking of pitches, here’s another very high-risk earnings trade — Amazon calls. I’m buying some April calls with strike prices above $200 per share. To review, buying calls means that I’m betting that the stock is going higher because for every call I purchase, it gives me the right to buy100 shares of the underlying stock for the predetermined strike price. If Amazon is right now at $190 and I pay $5 for one call that gives me the right to buy 100 shares of Amazon at $205 per share on the third Friday of April (options always expire on the 3rd Friday of each month). Then if the stock goes up to, say, $210 tomorrow, that call option will be worth probably about $10-12 each because they went from being “out of the money” to “in the money” after the stock passed $205. And if the stock goes down tomorrow to, say $170, then those call options will likely be worth about $2 or less because they are so far from being “in the money” since the stock would have to rally from $170 to over $205 before the third Friday in April for those calls to be worth money before they expire.

The reasoning behind buying AMZN calls today (counter-points to each reason is in italics and parenthesis):

• The stock is still down $246 where it was last year and has been hard hit since last quarter. (Of course, it’s also up in nearly a straight line from $160 in the last few weeks.)
• Few tech traders I know are willing to buy AMZN ahead of earnings this time because of the big hit they took after last quarter’s report. (But they’re also definitely “bullish” on the stock, even though they won’t put their money where their mouth is.)
• The Kindle Fire likely outperformed expectations as much as the iPad did for Apple last quarter. The question is — will the big bump to the revenues that come from selling so many Kindle Fires make analysts and investors happy? (Or will the hit to the gross margins that will come from selling Kindle Fires make analysts and investors wince?)
  
• Earnings estimates from the sellsiders for Amazon this quarter as a disparate and wide-ranging as I’ve ever seen. Some guys expect a loss of more than a quarter per share while others are looking for nearly 90 cents per share in earnings. The “Whisper” number (the number that most of the bulls are expecting to see as we head into the report tonight) is for EPS of 20 cents (1 cent ahead of “consensus estimates”). That sure could lead to a big jump if the company delivers on the bottom line despite the big Kindle Fire numbers I’m looking for. (Then again, that would also likely lead to a sharp sell off if the company’s top and bottomlines both come in light.

I think most analysts know that Amazon’s not concerning itself with trying to appease the sellside analysts and to hit their estimates in tonight’s quarter. Amazon’s trying to beat Netflix and iTunes five years from now. And the more Kindle Fires they sold and the more subscriptions to their Prime service they sold is what I think will catalyze the stock tomorrow. And I’m expecting both of those key metrics to come in much better than expected. So I’m buying Amazon calls even though I know how high risk EVERY earnings trade ALWAYS is.