What was priced in for Amazon?

Before an earnings trade, the first thing I look at is how much the market thinks the stock will move. Then I look at how much it’s actually moved before.

The options market can tell you the implied move for an earnings announcement. That’s basically the market’s estimate of how far the stock goes when they release.

So I compare it to the past earnings on that name. Have the previous ones brought larger moves than expected, smaller ones, or around what was expected?

That gives me a feel for whether the market typically does a good job of pricing in the earnings risk on that name. If it’s under-priced the move again and again, I’d be a lot more careful about selling that premium. If it’s over-priced it most quarters, buying options into the print starts to look like paying up for something that usually doesn’t show.

Some names have had some pretty staggering moves versus what was implied. And generally it seems like the bigger a company gets, the harder it is to move the stock on earnings. Though the really big names can still surprise you when the options activity has been large.

Amazon was priced to move around 7% last night. So far that looks bang on.

This comparison is part of my process, after I’ve looked at the regime and before I pick a structure. A lot of people skip straight to “calls or puts?” without knowing whether the move is already in the price. I walk through how I check that in the masterclass.

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