Amazon.com, Inc. (AMZN) – We could be about to move into a time with a lot of earnings preannouncements. Historically, July has been one of the most popular months for preannouncements over the last five years. As a result, it could be a prime market for options investors, especially since it looks like the options market usually overlooks July’s importance in terms of earnings preannouncements.
July second to January in earnings preannouncements
Goldman Sachs analyst Katherine Fogertey and team report that January is the only other month that tends to have more earnings preannouncements than July.
They add that the Technology and Healthcare sectors in particular are especially prone to earnings preannouncements in July. Their study indicates that 31% of Technology companies and 14% of Healthcare companies have preannouncement activities in July.
Earnings preannouncements not always bad for stocks
They also report that earnings preannouncements are not always negative for stocks even though potential exists for investors to be concerned about them. In 2014, they observed that almost half of all preannouncements turned out to be positive catalysts for shares. They define preannouncements as “any formal commentary by management regarding guidance and/or financials made intra-quarter.”
Of course such events are not planned, and they say that usually the options market overlooks them. As shown in the graph above, July earnings preannouncements typically peak in the second week of the month. The Goldman team reports that the options market is pricing in earnings volatility in the third and fourth weeks of July but not for the second week, which demonstrates how the options market is overlooking this potential.
Earnings preannouncements are also very difficult to predict, but options often become more attractively priced following them. The firm reports that often the options market underprices options after a preannouncement. Additionally, scheduled earnings reports after a preannouncement tend to move stocks more than usual.
As a result, the Goldman team suggests that buying straddles is more profitable around earnings preannouncements than it is usually.
Options pricing for Amazon looks attractive
Fogertey and team highlighted options trades for Amazon as being particularly attractive right now. They explained that the options market is underpricing typical earnings volatility around the company’s next earnings report, which is due on or around July 21. They particularly like the July 29 straddle for Amazon because at the time they wrote their report dated June 29, the straddle was priced at 10%, which is in line with the last eight-quarter earnings move even though it captures an extra 20 trading days “outside of earnings where shares have realized an average daily move of +/-1.5%.”
They add that Amazon’s one-month implied volatility is 39% and in the 66 percentile over the last year. As a result, they suggest that implied volatility could increase going into Amazon’s earnings as investors price in larger moves around the report.
The Goldman team suggests that options prices on the online retailer may be low right now because its stock is so high in terms of dollars (not valuation. They explain that since 1994, purchasing the closes listed one-month strangle on stocks trading higher than $100 per share has generated a 5% return on premiums, compared to 2% for strangles in general. Of course one risk associated with buying the July 29 straddle is that Amazon’s earnings report comes after the contract expires because the company has not yet released the date it will report the results from its June quarter.
