Carter Worth And Mike Khouw's Amazon Trade Going Into Earnings

On CNBC's "Options Action," Carter Worth spoke about Amazon.com, Inc. AMZN, going into earnings. The company is scheduled to report earnings on Tuesday, and Worth believes it is going to break out on the upside. The stock has been trading sideways for a while, underperforming the market and the SPDR S&P Retail ETF XRT. Seeing a wedge pattern now visible on Amazon's chart, Worth explained that the pattern is a sign of equilibrium before something occurs.

Mike Khouw suggested a call calendar as a way to trade Amazon ahead of earnings. He would buy the June $3,300 calls for $274 and sell the February $3,550 calls for $37.50. The trade would cost him $236.50. The idea behind the trade is that shorter-dated calls are going to decay faster in case the stock continues to trade sideways. If it moves higher the options structure offers $13.50 of upside potential as the trade breaks even at $3,536.50. Additionally, Khouw can lower his cost basis by selling another call if the shorter-dated call expires worthless.