Thursday, October 22, 2009

Zeroing in on AMZN Earnings

After the bell, Amazon reported a third quarter EPS of $.45. Given that analysts' estimates for EPS was around $.30, it's fair to say AMZN knocked the cover off the ball. Following the announcement traders immediately began aggressively bidding up shares in the after-hours trading session. Though AMZN saw it's stock price close today's trading session nearly unchanged at $93.42, it was recently trading up to $106.50, a 14% increase.

Due to a few meetings that have required my attention today, I was unable to do a pre-earnings post on AMZN. Nevertheless, I still want to offer up a few volatility thoughts regarding the online retailer (these were penned before tonight's announcement).

Like AAPL, AMZN has seen its IV rise to the same level it was at prior to last quarters earnings announcement (47%). Which basically means the expected rise in realized vol due to the usual earnings gap are expected to be somewhat in line with last quarters earnings announcements reaction (click image to enlarge).

[Source: Livevol Pro]

A comparison of front month straddles (day before earnings vs. day after) over the last 7 earnings announcements, shows that vol sellers have won or broken even (roughly) 6 out of 7 times. The one loss is boxed below in blue. Perhaps there are two different ways to dissect this information. Let's first assume we're volatility sellers (not a stretch considering I usually am).

[Source: Livevol Pro]

On the one hand, which we'll call our 'optimistic' hand, we could assert this certainly puts the odds in the favor of vol sellers as it seems the volatility bid up has been consistently overdone in virtually every announcement over the past two years.

On the other hand, our ‘pessimistic’ hand, I suppose we could assert that perhaps we’re due for large reaction rewarding vol buyers simply because it hasn't happened for awhile.

Though I'm not sure which view I like better (ask me tomorrow when I have the gift of, they are both certainly worth considering.

In the end, no matter how much data we mine through, there’s still no way to forecast the future with 100% reliability. I’m assuming, indeed hoping, all of you know that. It certainly helps to assess past earnings reactions as a guidepost for what the "norm" is regarding implied and realized volatility around earnings. But we must concede that each earnings is unique and anything can happen. Hence the need for risk management, position sizing, yada yada yada...

1 comment:

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