Amazon (AMZN) Option Traders Bearish After Revenue Miss

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Amazon (AMZN) Option Traders Bearish After Revenue Miss

Following the announcement that Amazon.com, Inc. (AMZN) missed sales projections for its fiscal second quarter financial results, option traders are taking measures that indicate they believe the share price will fall in the future. This is hardly surprising given that the AMZN share price declined 7.5% the day after the report was released.

Amazon announced profits per share (EPS) of $15.12 and sales of $113.1 billion, topping analysts’ forecasts for EPS of $12.47 but falling short of $115.4 billion in revenue. Notably, Amazon CFO Brian Olsavsky cited harsh year-over-year comparisons to operations during pandemic lockdowns for the company’s reduced sales outlook for the third quarter. Prior to the announcement, investors kept the AMZN share price range constrained, with a substantial amount of put options in open interest.

Option trading volumes suggested that traders were selling calls and buying puts; nevertheless, option activity after earnings suggests that traders are not confident in AMZN’s share price in the future. This is due to the price action, which saw the stock drop dramatically, dropping far below the 20-day moving average, and option activity, which indicates that traders are both buying puts and selling calls.

Key Takeaways

  • Following the results report, traders and investors sold off shares of AMZN, causing the price to fall 7.5%.
  • AMZ’s stock finished well below its 20-day moving average.
  • Put and call option activity looks to be positioned for more price declines.
  • The volatility-based support and resistance levels allow for a more aggressive upward surge.
  • This scenario provides traders with a chance to benefit from a reversal in the earnings-based share price decrease.

Option trading is simply a gamble on the market’s probabilities—a bet made by traders who, on average, are more educated than most investors. Understanding the circumstances in which the price change occurred is critical to gaining maximum understanding into option trading activity. The chart below depicts the price activity for AMZN’s share price on August 5, showing the setup after the earnings announcement.

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Current Trends

The stock’s one-month trajectory saw it slide from its all-time high in mid-July to a reasonably ordinary range, before plunging 7.5% the day following the news. The price closed at the lower extremities of the technical studies represented on this chart.

The 20-day Keltner Channel indicators are used to create these studies. These are price levels that are multiples of the stock’s Average True Range (ATR). This array highlights how the price has plummeted from the center of the range to the bottom boundaries. This price movement in AMZN shares suggests that investors have reduced their valuation of AMZN in the future.

Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average amount of time employed in its computation is 10 to 20 time periods, which comprises two to four weeks of everyday trading.

Based on the price movement for AMZN sliding from the top of the volatility to the range to the center, chartists can see that traders were expressing concern heading into earnings. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, it seemed that traders expected Amazon shares to fall following results.

Tip

The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an excellent visualization tool for charting historical volatility.

Trading Activity

The recent activity of option traders implies that they consider Amazon shares overvalued and have bought put options as a bet that the stock will close within the box depicted in the chart between today and Aug. 20, the next monthly expiration date for options. The red-framed box represents the pricing that the put option sellers are offering. It implies a 69% chance that AMZN shares will close inside this range or lower by Aug. 20. So sellers are only mildly bearish. However, buyers are snapping up this pricing, suggesting that buyers consider these options underpriced. Since the pricing implies only a 31% chance that prices close below this red box, it appears that buyers are willing to take those long odds.

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It’s important to note that the open interest on Aug. 5 featured over 527,000 calls compared to over 516,000 puts. This normally implies that option traders are expecting upwards price movement. After earnings, the volatility has decreased dramatically, but the number of call options in the open interest has increased, while the number of puts remains elevated. It’s notable that the implied volatility for call options is falling, signaling that these options are being sold, creating a bearish sentiment.

Put volume outnumbers call volume for strikes at the money and one step either way. Out-of-the-money put option volume is declining at a slower pace than out-of-the-money call option volume, indicating that more traders anticipate AMZN share prices will fall than increase.

A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric creates closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months.

The levels marked by the turns are noted in the chart below. What stands out in this chart is the wide discrepancy between call and put prices, with lots of room to go higher. This shows that option purchasers are more confident that the price will fall in the weeks after the report. Despite the fact that investors and option traders anticipated favorable movement from the report, the share price fell lower than it did following the last earnings announcement.

These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, a significant shift in either way is probable in the near future. AMZN shares plummeted less than 1% the day after the prior results report before plunging further the following week. Investors may anticipate a similar price movement in the week after this release. With so much space in the volatility range, share prices may increase or fall more than anticipated in the short term; but, there is more capacity in the volatility range to support an upward trend.

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Wrapping Up

Amazon exceeded analysts’ earnings per share forecasts but fell short on sales projections. The firm issued lower-than-expected third-quarter forecast, which management blamed on difficult year-over-year comparisons to operations during pandemic lockdowns. As a result, several traders and investors lost faith in the firm and revised their valuations downward, driving the share price below the lower limit of the volatility range on the charts. Option traders seem to be selling calls and purchasing puts, indicating a pessimistic view. This activity, on the other hand, creates more space in the volatility range for a future increase in the share price.

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