How to Play Amazon Ahead of Earnings


Amazon ( AMZN ) is set to release its Q1 earnings this afternoon. The e-commerce giant is expected to show a slight dip in profits, with with earnings of $0.10 per share. This expectation has dropped from around $0.33 in the past three months, though it still represents a year-over-year increase in revenue of 22.6%.

Amazon has made a string of big announcements in the past several months. It has increased fees over the past year for third-party sellers using its service, but also appears to have a powerful enough hold on the market to ward off retaliatory price cuts for similar services from eBay ( EBAY ). The fee hikes will continue to improve the company's margins, which in 2012 increased from 2.7 to 3.2%. Further attempts to expand margins may be in the works, though Amazon will have to exercise caution as businesses have begun to express their frustration with the fee hikes.

There are also whisperings of a set-top box, to be released later this year, that would stream video from Amazon's ever-expanding online video catalogue. This falls in line with prior revelations of projects as diverse as a mobile phone, and potentially more tablets to accompany and expand upon its current Kindle project. CEO Jeff Bezos currently seems far more concerned with growth than profits, and has credibly signaled his intent up to this point. Analysts remain overwhelmingly bullish on the stock; whether or not this attitude is maintained will depend on Amazon's ability to follow through effectively on these signals.

I think AMZN will rally higher, and it has a measured move target to $255 and $295 based on the ATM Straddle.

Trade: Buying the AMZN May 280-290 Bull Call Spread for $3.40
Risk: $340 per 1 lot
Reward: $660 per 1 lot
Breakeven: $283.40

Greeks of this Trade

Delta: Long
Gamma: Long
Theta: Short
Vega: Long

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Earnings , Options

Referenced Stocks: AMZN , EBAY



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