AMZN beat. Or something like that. Sheesh.
In the context of this declining volatility, I feel that the current strategy for most earnings trades would be to sell volatility prior, with the expectation that the move will not be greater than what the options are pricing in. When you sell volatility, you're looking to make money from the premium being sucked out of the contracts after the event, as the perceived risk is no longer great and investors and traders no longer need to buy "insurance" at that price.
And it's worked quite well. I traded ISRG under that assumption and the trade paid out very well.
The trade I made was an iron condor. That is when you sell a call vertical and a put vertical at the same time, so you make money within a particular range. My strikes were 85/80 on the put side and 110/115 on the call side. The trade would make money if AMZN stayed within about 78 and 112 by November expiration. This was a bearish bet on vol, meaning I was thinking that the premium traded in OTM options was too high of a value compared to the price move ahead.
Instead, AMZN moved about twice as further than what the options priced in.
So, what do you do from here, at the open?
And this is one of the drawbacks of options, especially if you watched the boards. First, the market makers are going to remove some of the liquidity out of the market as the price is going to be fast-moving-- so the bid/ask spread opens up, and the arb firms just want to pick off the shorts that had to cover. And I definitely did not want to be caught on the short side of my call spread I sold, but I cannot exit out of the trade efficiently.
This is where delta hedging comes into play. Thankfully the downside was limited because I bought the wings, so the calls I bought helped to offset the losses from the calls I sold. I ended up being somewhere around -50 delta, which means the full aggregation of my AMZN position was similar to shorting -50 shares. And I would not want to be holding -50 shares short going into that trading session.
So I flipped my position around and bought a single lot of AMZN, which got my delta back to +50. The risk of doing a full flip is that the gap can start filling and then you look quite foolish as you're getting chopped around. But judging by the price action and how the bid kept lifting into the open, I felt that this was the right choice.
All in all, ended up being close to a scratch, which rarely happens but in this case it did.
So where do I think AMZN is going in the near term? Let's check out two other cases of similar price action:
So... AMZN? Most likely going to continue the upside momentum.