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Option Trading: Buy or Sell Straddles in Amazon.com Inc (NASDAQ:AMZN)




Amazon.com Inc (NASDAQ:AMZN) : Trading Straddles

Date Published:

OPENING
As we look at Amazon.com Inc we note that deciding whether to buy or sell options (in this case a straddle) is probably the most important question when it comes to option trading. But a cursory analysis of a short straddle will miss the fine points required -- especially surrounding earnings.

There's a broader question we are looking to answer -- has owning options or selling options been the winner in Amazon.com Inc (NASDAQ:AMZN) .

Option trading is volatility trading, whether we mean it to be or not. If that sounds a little weird to you, we actually suggest you stop reading this article, and instead read our option primer: Understanding Option Skew -- What it is and Why it Exists.

If you're already on top of volatility and the impact it has on option trading and earnings -- let's get going.

Discover the power of applying science to your options trading in a free webinar:
Discover Scientific Options Trading


STORY
There's lot less luck involved in successful option trading than some people have come to know. We'll get specific with short straddles on AMZN. Let's look at a three-year back-test of a short straddle strategy with these quick guidelines:

* Test monthly options (roll the trade every 30-days).
* Avoid earnings.
* Examine the at the money straddles.
* Test a short straddle looking back at three-years of data.

We want to introduce how easy this is with the right tools but also how important it is to make sure you use them. Just tap the appropriate settings.



And now the findings.

RESULTS
If we did this short straddle in Amazon.com Inc (NASDAQ:AMZN) over the last three-years but always skipped earnings we get these findings:

short 50 Delta Straddle
* Trade Frequency: 30 Days
* Back-test length: three-years
* Always Avoid Earnings

Gross Gain: $61,476
Gross Loss: -$50,840
Wins: 24 Losses: 15

Short Straddle Return:  35.6

Selling a straddle every 30-days in AMZN has been a pretty substantial winner over the last three-years returning  35.6%. Even better, the strategy has outperformed the short straddle that was held during earnings.

GOING FURTHER WITH AMAZON.COM INC
That first step of analyzing a short straddle while avoiding earnings is nice -- but let's go deeper.

Let's look at the same analysis, but we will only look at earnings. Specifically, we will short the straddle two-days before earnings, then close the option position two-days after earnings.



Here are those results for the same short straddle:

short 50 Delta Straddle
* Trade Frequency: 30 Days
* Back-test length: three-years
* Only Trade Earnings

Gross Gain: $25,270
Gross Loss: -$26,318
Wins: 5 Losses: 7

Short Straddle Return:  -2.5

Selling an uncovered straddle in Amazon.com Inc during earnings was not only a loser, more importantly, it returned less than the same short straddle that avoided earnings. But, there's a bigger picture here.

Having historical analysis in hand before option trading maps the decision process about what to trade, when to trade, and even if the trade is worth it at all. Now let's go beyond Amazon.com Inc and trading short straddles to something that makes a difference in our trading lives.