Investors of Amazon.com, Inc. (AMZN) have kept the share prices range bound going into the company's fiscal second quarter earnings announcement. At first glance, it appears that option traders are positioned for a negative move, as there are a greater number of put options in the open interest than calls. The unusual option trading may create a strong upward trend in the price action if Amazon delivers a positive earnings surprise. 

A sizable amount of put options remain in the open interest for Amazon, and option premiums are unusually high right now. Trading volumes indicate that traders have been selling calls and buying puts in anticipation of a negative earnings report. Unwinding these bets could result in unexpected downward pressure on the share price of AMZN.

Correctly predicting the direction a stock will move following earnings is difficult. However, a comparison between the stock's price action and option trading activity shows that, if AMZN delivers a positive report, the company's share price could rise significantly, moving closer to its all-time high after the announcement. This is possible because options are priced for a move downwards, but unexpected good news could catch traders by surprise and create a rapid rise in share price.

Key Takeaways

  • Traders and investors have kept Amazon's share price range bound headed into the earnings announcement.
  • The share price has been closing just above its 20-day moving average, having fallen from its recent all-time high. 
  • Call and put pricing is predicting a stronger move to the downside.
  • The volatility-based support and resistance levels allow for a nearly equal move in either direction.
  • This setup creates an opportunity for traders to profit from an unexpected earnings outcome.

By comparing the details of both stock price and option behavior, chart watchers can gain valuable insight, although it is imperative to understand the context in which this price behavior took place. The chart below depicts the price action for the AMZN share price as of Wednesday, July 28. This created the setup leading into the earnings announcement.

Earnings pricing for Amazon.com, Inc. (AMZN)

Current Trends

The one-month trend of AMZN stock has the shares rising to the top of the volatility range before falling to rest just above the 20-day moving average. Over the past month, it's notable that the lowest AMZN share price was near $3,402 in late June, whereas the highest share price was nearly $3,773, an all-time high, in mid-July. The price closed in the middle region depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has moved to a middle range in the week before earnings. This price move from Amazon shares implies that investors expect a negative earnings result.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context where the price trend for AMZN has fallen to an average range, chart watchers can recognize that traders and investors are expressing pessimism going into earnings. However, it is notable that, in the week before earnings, AMZN's share price fell from its all-time high before rising above the 20-day moving average a few days before the report. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for unfavorable earnings or not.

Option trading details can provide additional context to assist chart watchers in forming an opinion about investor expectations. Recently, option traders are favoring calls over puts by over 1.5-to-1, yet the open interest on options has a slightly greater number of puts than calls. Normally, this volume suggests that investors are expecting a positive earnings report, but the open interest speaks otherwise. 

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders recognize that Amazon shares are in an average range and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and July 30, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 35% chance that Amazon shares will close inside this range by the end of the week if prices go higher. The red box represented the pricing for put options with a 33% probability if prices go lower on the announcement.

It's important to note that the open interest featured over 439,000 active call options compared to roughly 459,000 put options, demonstrating the bias that option buyers had, as the slim majority of the trades were put options. This amount normally implies that put option traders expect a decline in price. However, because the call box and put box are relatively equal in size, it tells us that the higher percentage of put options traded has only mildly skewed expectations lower. A far more complacent outlook is implied.

Option pricing for Amazon.com. Inc. (AMZN)

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run either downwards or upwards. This suggests that option buyers don't have a strong conviction about how the company will report, even though puts are being purchased over calls. Although investors and option traders do not expect it, a surprising report could push prices dramatically higher or lower.

Volatility pattern for Amazon.com, Inc. (AMZN)

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, AMZN shares fell by less than 1% the day of earnings and continued to fall the following week. Investors may be expecting the same kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

As a bellwether stock, Amazon's earnings can have a significant impact on index and stock prices. No matter what the report says, it will likely have an impact on stocks in the consumer cyclical sector and even the technology sector.

Amazon is one of the biggest stocks in the world and as one of the heaviest weighted stocks in many exchange-traded funds (ETFs). Amazon's earnings are pivotal for market health. A positive report could lift major ETFs such as State Street's Consumer Discretionary Sector ETF (XLY), State Street's S&P 500 Index ETF (SPY), or Invesco's QQQ Trust ETF (QQQ). Similarly, if Amazon reports positive results, it could lift other stocks in the sector, such as Alibaba Group Holding Limited (BABA), The Home Depot, Inc. (HD), or Nike, Inc. (NKE).