Play Amazon.com Ahead of Earnings

Amazon.com, Inc. Credit Spread (Nasdaq: AMZN)

Amazon.com (AMZN) is setup for a short-term (8-day) bearish option strategy ahead of its earning announcement next week. Investors could simultaneously:

Sell the July week-four expiration AMZN $330 call for $2.34 (yesterday's closing price)

AND

Buy the $335 call at $1.65 (yesterday's close)

The difference between funds received and paid out is a .69 per share credit which we keep if Amazon.com closes below $330 on Friday July 26^th, but immediately exit the position if it appears the price will end up higher. If the stock price gaps higher then we will probably initiate the call spread at a higher strike prices with the same risk profile as described above.                                                                                                    

Why we recommend it:

Most of the major stock indexes are hitting on all cylinders as they continue pushing up all-time highs. Equities are following a pattern that began when the stock market bottomed out at the end of last year - during earning season prices rise to loftier levels. Amazon.com, Inc. (Nasdaq:AMZN) stock price rode the bullish trend with most of the major equity indexes in hitting its all-time high a few days ago along. Fed Chairman Ben Bernanke comments over the past few days put the 'tapering' QE issue to rest for the time being and investors are now zeroing in on companies financial reports. Second-quarter earning season started well with financial companies taking the lead and announcing favorable results. The tech sector part of earning season is starting on rocky footing as technical bellwethers Microsoft and Google missed Wall Street second-quarter projections. As the other major equity indexes rose higher today the tech sector lost ground and shares continue to weaken in after hours futures trading.

As mentioned above, Amazon shares are already near all-time highs and as confirmed in the chart below the stock is now into severely overbought levels as signaled by technical indicators. The overbought condition will need to be absorbed before Amazon stock can move much higher and as evidenced in the chart prices are already starting to pull back significantly. It will probably take knock-out numbers next Thursday when Amazon announces earnings to catapult shares much higher as another issue holding the stock in check is Google's big press announcement scheduled for next Wednesday. The consensus appears to be that Google will unveil the newest version of Android while launching a second-generation Nexus 7 tablet. Google's future plans could have notable competitive implications for competitors such as Amazon. We are betting Amazon.com shares will remain constrained until it releases second-quarter results, at the very least there is a high probability the stock will remain below the target price for another week.

52-Week High: $309.39

52-Week Low: $214.95

Average Volume (3 month):   3,074,930