Options Update: Volume Surges on Amazon.com Following EMI Music Deal
Play that Funky Music, Amazon.com
Amazon.com
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What this means is consumers who purchase EMI music from Amazon.com will be able to play those songs on virtually any digital music player, as well as copy those songs to a compact disc for personal use.
Now, those of you who read my recent rant on Warner Music Group
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EMI Started the Fire
My music rant aside, Amazon.com’s EMI deal and subsequent 11% surge today has caught the attention of more than just audiophiles, as options players have jumped at the chance to speculate on the security today. This surge in option volume amid today’s news is what caught my eye today. According to today’s Intraday Volume Explosion List, both puts and calls have been extremely active on AMZN. On the put side, some 38,458 contracts have changed hands, more than doubling the security’s average daily put volume. Meanwhile, call volume has more than tripled the daily average, with more than 38,470 contracts crossing the tape.
I had a knee-jerk reaction when looking at the closely matched put and call volumes; I thought we might be looking at some sort of straddle play heading into option expiration. My first tip to the contrary was that the majority of this volume crossed at the August 85 strike. More often than not, speculators are not bold enough to attempt such a play with only 4 days until expiration. My second tip that today’s activity was not of the straddle variety was that neither the August 85 put nor the August 85 call saw blocks trade in tandem (i.e. at the same time).
Amazon Calling
Digging into today’s volume, the August 85 put saw more than 10,048 contracts change hands. Most of this activity was concentrated within smaller block trades, usually numbering about 100 to 500 contracts. Early in the session, these trades tended toward the bid end of the spectrum, hinting that options traders were bailing on their losing positions as AMZN surged higher. However, later trades indicated that buyers could be coming into the market, with August 85 puts trading largely at the ask price. These speculators could be taking advantage of the relatively low option price following the spike in the underlying shares, hoping to profit from a consolidation or pullback in AMZN as the week wears on. Currently, open interest at this front-month contract currently rests at just 1,554 contracts, indicating that we could see a spike in open interest following translation tomorrow morning.
On the call side, nearly all of the August 85 call volume was trading closer to the ask price. This activity suggests that options speculators are betting on a continued run higher in AMZN shares through the end of the week. Volume was lower than the put side, as roughly 8,900 August 85 calls had crossed the tape when we pulled our figures. Open interest at this front-month contract currently rests at 11,642 contracts.
Bears Rock the Kasbah
Today’s skew toward put volume is nothing new for AMZN, as bears have long dominated the equity’s sentiment backdrop. Specifically, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 1.57 indicates that puts easily outnumber calls among near-term options. Furthermore, this ratio ranks above 88% of all those taken during the past year, meaning that options speculators have been more pessimistic only 12% of the time in the prior 52 weeks.
However, these speculators have a bad habit of being on the wrong side of the trade, and such is the case with AMZN. Heading into this morning’s news, peak put open interest in the August series of options rested at the deep out-of-the-money 60 strike, totaling nearly 14,000 contracts. By comparison, the in-the-money August 80 call was home to peak call open interest of roughly 15,000 contracts. The option skew was clearly toward out-of-the-money puts and in-the-money calls, leaving the path of least resistance to the upside during expiration week.
Outside of the options pits, short interest accounts for nearly 11% of AMZN’s total float, despite a 6% drop in the number of shorted shares during the most recent reporting period. The equity’s surge today could be making these bearish investors nervous, and a short-covering rally on the news could be exacerbating AMZN’s upside. Should the shares break out above round-number resistance at the 90 level, we could see more capitulation from short sellers, potentially resulting in additional gains for AMZN.
The Long Run
The stock’s reaction to the EMI news forced AMZN above all of the potential short-term and intermediate-term sticking points. The 85 level, home to a hefty accumulation of call open interest, and the 10-month moving average have both fallen by the wayside due to today’s 11% surge. There are a handful of hurdles above AMZN at this point, with the most pressing being the round-number 90 level. The shares have not toppled this region on a monthly basis since December 2007. A breakout above this level places AMZN in contention with the 95 level, and then the century mark. However, despite these lingering speed bumps, a monthly close above the 90 level would be a solid victory for AMZN bulls.
The Verdict?
If AMZN can push past the 90 level, a continued unwinding of negative investor sentiment could provide the catalyst to help push the shares steadily higher. Short sellers clearly would not like to see the security break out above this round-number resistance, as a covering rally could have AMZN knocking at the 100 level in short order. However, market volatility and technical resistance must be taken into account. If the stock is unable to best the 90 level, a consolidation period into the 85 region could kick AMZN sideways for the short-term. That said, any pullbacks to the 85 level could be seen as buying opportunities given the stock’s long-term uptrend.
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