Amazon (AMZN) will report earnings today after the market close. The Jan options expire tomorrow and has tremendously high implied volatility (IV).
If you are bullish on AMZN shares, but want to put on a trade that would take advantage of the high implied volatility (and may position yourself for a nice rally into next week), then you can do the following trade.
The trade: Jan weekly/Feb weekly Calendar spread. Sell the 200-strike CALL expiring tomorrow and buy the 200-strike CALL expiring next Friday. The trade is most profitable if AMZN trades at 200.00 by 4:00 PM tomorrow with 1 to 9.5 risk/reward.
What if you are not sure about the direction but want to take advantage of high IV? Please consider the following:
You could do a similar trade on both the CALL and PUT sides with a risk/reward 1 to 5.65! You make the most money if AMZN trades at either 200 or 160 by 4:00 PM tomorrow.
DevTrade (Full Disclosure: Long Jan weekly/Feb weekly Calendar spreads (Call and Put) at the time of writing)
This is an amazing pro trade, which shows how to exploit the short time period spike in implied volatility. This clearly shows the difference between trading in markets and gambling in a casino. Odds cannot be better than this. Lets all thank DevTrade for enlightening us
Thanks, Bear_Flattener! The whole purpose of this blog is to share our thoughts to improve our trading skills… I hope more and more people will be comfortable trading options in the near future…
I am glad that you have also pointed out: “This clearly shows the difference between trading in markets and gambling in a casino”! Yes… trading is not mere gambling!!!
Now… before the market opens… I would like to point out that if AMZN starts trading higher after open and makes an attempt to climb toward 175-area… it would be prudent to close this position with some profit instead of waiting until later part of the afternoon. To emphasize: Your profit trails off as AMZN goes toward 185.