Analysts may be optimistic about Amazon.com's growth prospects, but with this week's blowout earnings from Apple and Amazon's own lofty share price to live up to, some traders are starting to hedge their bets.
The options market is gearing up for Amazon shares to jump or fall about 7 percent once the world's largest Internet retailer reports quarterly earnings after the bell on Thursday, and the bias is shifting slightly toward expectations of a decline.
Wall Street expects Amazon to report earnings of 7 cents a share on revenue of $12.86 billion, according to Thomson Reuters I/B/E/S. But some traders say Apple Inc's performance has raised the bar.
Shares of the iPad maker and tech titan surged about 9 percent on Wednesday after the company said first-quarter earnings leapt 94 percent to $11.6 billion, or $12.30 a share.
"Amazon expectations may be higher than normal on the back of Apple earnings," TD Ameritrade chief derivatives strategist JJ Kinahan said.
"One statistic to keep in mind is that Amazon shares are up more than 10.5 percent since their last earnings release in late January," he said. "So they may have to beat the expected 7 cents earnings per share in order to rally significantly."
By midday Thursday, there was more activity in Amazon puts - options designed to defend against a falling share price - than Amazon calls, particularly in the weekly options that expire on Friday after the close.
Among the busiest puts were the weekly $170, $180 and $190 strikes, according to Joe Bell, senior equity analyst at options research firm Schaeffer's Investment Research in Cincinnati.
Amazon shares were last changing hands at $194.56, up about 0.2 percent on the day.
A 7 percent move in Amazon shares would still be below the stock's average move on earnings reports, which is plus or minus 8.03 percent, according to Bespoke Investment Group in Harrison, New York.
Bell said the shift reversed a bias toward Amazon calls that had prevailed over the past 10 days and could mean investors are hedging against an earnings disappointment or establishing "outright bearish bets."
If the latter, they may have drawn inspiration from StarMine data, a Thomson Reuters company, which holds the retail giant's shares should be trading around $30 rather than more than $190.
Sridharan Raman, a StarMine analyst, said that is because the company's share price means the market expects Amazon to grow earnings at a 33 percent rate over the next 10 years, "and that's overly optimistic."
"The bulls are arguing that investment in the cloud and in selling content should pay off this year, making up for last year's less-than-stellar operating margin," said Dan Nathan, a co-founder of RiskReversal.com, who owns Amazon May put options.
"A material uptick in operating margins in 2012 would not be enough to justify the stock trading at about 150 times 2012 expected earnings."
By mid-afternoon on Thursday, Amazon option volume consisted of 53,000 puts and 42,000 calls, yielding a put-to-call ratio of 1.26, according to options analytics firm Trade Alert.
Analysts in general have been fairly optimistic about the company. Some say naysayers overlook Amazon's role as an operator of online platforms that let third-party merchants sell to its customers via Amazon.com.
These can be more profitable than traditional retail operations because Amazon does not have to buy products or store them as inventory.
A strong first quarter for EBay Inc, a leader in e-commerce, has many betting Amazon will deliver a pleasant surprise as well.
Analysts at Tiburon Research Group said in a note to clients they expect Amazon "to absolutely crush consensus earnings per share estimates," predicting earnings of 21 cents per share on revenue of $12.909 billion, with higher-margin third party sales a big contributor.
Even though puts are outpacing calls in the options market, volume has not been excessive, said Tim Biggam, strategist at options trading firm TradingBlock.
He added that to some, the stock may not look as over-valued as it did last year, when it traded above $240.
"The valuation of Amazon shares is still rich but has tempered, so option players seem a little bit more comfortable at the present stock levels of around $195," he said.
(Reporting by Angela Moon, Doris Frankel and Caroline Valetkevich, writing by Steven C. Johnson. Editing by Bernadette Baum and Dan Grebler)