Amazon Option Bets Suggest More Gains May Lie Ahead

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Amazon.com Inc. (AMZN) shares have risen by nearly 20% so far in 2018, and the options market is betting its shares can increase another 10% from their current price of $1,400, taking the stock to around $1,550. The options betting is taking place ahead of the company reporting its fourth-quarter results on February 1. 

As previously noted, Amazon shares have surged to start 2018, as investors anticipate what could be an excellent fourth quarter for the company, on the heels of a strong holiday shopping season. According to Ycharts, the company is expected to report that revenues for the fourth quarter rose by nearly 37% from the previous year to $59.85 billion, while earnings are expected to have increased by 19% to $1.83.  (For more, see also: Why Amazon's Stock Is Surging 15% Ahead of Earnings.)

Bullish Bets

The options market seems overwhelmingly bullish and may indicate that whatever these current earnings results yield, it is likely to result in a stock price that continues to rise. The options set for expiration on April 20 are indicating shares could rise or fall by 12% using the $1,400 strike price long straddle options strategy. It would cost nearly $168 to buy one put and one call to make a bet. There are only 636 contracts of open interest on the calls, vs. an even smaller 80 contracts for the puts. But do not let the number of contracts fool you—the notional value for the calls is about $5.6 million, meaning traders are betting heavily that the price of Amazon stock is set to rise. 

(Option Table From Yahoo Finance)

Massive Range

The options imply that the price of Amazon could trade in a range of about $1,230 to $1,570. This is a massive spread greater than 20%. 

Over $1,500

But it is the options at the $1,500 strike price that are most impressive and are suggesting the price should continue to rise. There are over 1,800 call contracts of open interest at that strike price, and at the cost of $47 per contract, this would mean that the price of the stock would need to be a price of $1,547 just for them to break even. But those options represent a notional value of about $8.6 million, which is a reasonably large bet considering the stock price would need to rise by 10% just to break even. (For related reading, see also: Why Amazon's Stock Is Poised to Reach New Records.)

Amazon is going to have to deliver in a big way when it reports its results. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.