In Part 1 of this series, we talked about why volatility tends to spike during earnings season.
For many, the potential for large, quick profits on a dramatic move up or down in a company’s stock is seductive. Trying to guess whether the price will go up or down (or sideways) is a crapshoot.
We’re always looking for higher probability setups to get an edge, and a roll of the dice is not our trading style. We also talked about finding a smarter way to trade binary events like earnings announcements.
If that sounds interesting, you can sign up for John Carter’s free training on Wednesday October 11th. He will discuss his 3-Phase Option Position Sequence for trading earnings.
Today we’ll talk about the prospects and challenges in trading earnings on Amazon (AMZN)
Everyone’s favorite online retailer has had a pretty momentous year.
- Amazon (AMZN) is up nearly 27% on the year (compared to about 12% for S&P index)
- Share price hit record high of $1,017 in mid-June
- Amazon purchased Whole Foods (seemingly out of the blue) for $13.7 billion in Q2, but did not receive the FTC’s blessing at the end of August
- Amazon now has a deal in place with Sears to sell Kenmore brand appliances online, something no other company outside of Sears can say
But there’s also been a lot of hesitancy on the part of investors.
Yes, Amazon soared up to a record high of $1,017. However, following that spike, shares fell back down to $960. That’s a significant drop of $57/share, or 5%. And since then, it’s just hovered in that range, waiting to make another move.
What caused the drop?
Funny you should ask, because the answer is … Earnings.
Amazon reported earnings of $0.40 per share, which means the company still produced a healthy profit. So, if Amazon still made a healthy profit, why did share price drop like a rock?
Expectations for Amazon’s Q2 earnings were $1.42 per share. The year before, Amazon reported earnings of $1.78 per share. So, while the world’s largest online retailer produced profits, those profits were significantly less than expected, causing a big move down.
What does all this mean for Q3 earnings expectations?
Truth be told, no one knows.
We can guess at the news all day, but in the end, we’re still just guessing — which is one big roll of the dice. And that’s just not how Simpler Trading operates.
The general population is excited about Amazon’s acquisition of Whole Foods given that Amazon has already begun slashing prices and incorporating its practices into the grocery chain, but investors aren’t quite so thrilled. And that’s because they don’t know what to expect from the deal.
Amazon has announced plans to enter the meal-kit delivery service, but does that tie specifically into the Whole Foods deal?
What will Amazon’s costs, operations, and learning curve look like? Running its online store and warehouses are a science for Amazon at this point. But does that science translate to a physical brand with products that expire quickly? Obviously, Amazon has a plan for Whole Foods. The question is; will the plan actually work?
Investors aren’t so sure, which means earnings are uncertain.
One thing is clear, however… Amazon is primed for a big move.
But is that move going to be up?
With a 3-Phase strategy we don’t need to know the answer to make extraordinary gains.
Just because we don’t know what’s going to happen to the stock itself doesn’t mean earnings trades have to be a roll of the dice. Because earnings happen each quarter, the volatility is the one thing we can predict with great certainty.
And because we know when to expect that volatility, we can extrapolate information using very specific tools to designed to help us prepare for ‘profitably irrational’ conditions.
To really leverage that profit potential while limiting risk, Simpler Trading focuses on trading options.
More specifically, we use a 3-phase earnings strategy developed by John Carter, which includes:
- What happens leading up to earnings
- What happens the day of earnings
- What happens in the period following earnings
Thanks to a custom options backtesting tool John discovered, it’s possible to determine which option strategy offers the greatest profit potential.
Earnings season is an amazing window of opportunity to reap massive profits — if you’re doing it right and not rolling the dice.
Look, if you’re not sure where to start, or unfamiliar with the terminology or strategies needed to execute profitable, successful trades, join John Carter and he’ll answer all of this for you in his free, live training to cover his proven 3-phase earnings strategy.