The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) -- This week kicks off the truly exciting portion of earnings season. It does not get much better than Netflix ( NFLX), Apple ( AAPL) and Amazon.com ( AMZN) all reporting in the same week.
Nonetheless, the stock could get hit. I'm not about to take a flyer by going long an out-of-the-money put, particularly one that expires in May or June. That's partially because I am bullish, but even as a trade I cannot get with that. I elaborate on how to play bearishness when I round out this article looking at prospective Netflix trades. Because I want to be long AMZN, I would entertain doing one of two things. Using Friday's closing prices, I could sell an AMZN May $185 put and collect about $6.30 worth of income. That protects me all the way down to $178.70. If AMZN implodes post-earnings and drops below $185, there's no need to get hysterical. While you could get put shares at $185 prior to expiration, chances are you will not. In most cases, particularly with a stock like AMZN, you will get assigned if the underlying trades below the put's strike price at expiration. But, for the record, just know that you could, theoretically, get put shares at any time. I like the $185 put because if AMZN does plunge initially, I think it will do what it has a history of doing -- coming back strong in the weeks after earnings. If I do not get put shares, no big deal, as I generated some nice income in exchange for tying up some cash to secure the trade (I prefer cash-secured over naked puts). Of course, it only makes sense to keep the $18,500 required to buy 100 shares of AMZN on hold if you have a pretty large-sized portfolio and/or cash balance to begin with. The second way I would play AMZN bullishness into earnings is the same way I would play AAPL optimism. Use a buy-write to get long each stock, assuming two things:
You are long-term bullish and would be fine owning a stock ahead of unanticipated weakness; You select a strike you would be fine having to sell your shares at in the event you get assigned. Again, using Friday's closing prices, you could buy AMZN stock for $189.98 and, for every 100 shares you purchase, you could sell the AMZN May $200 call and take in $4.60 in premium income. It's called a buy-write because you buy the stock and sell the call in one transaction. With AAPL, you could buy the stock for $572.98 and, for every 100 shares picked up, you could sell the AAPL May $610 call and collect $15.05 in premium income.
On the AMZN buy-write, you turn a 7.7% profit if you get your shares called away. On the AAPL trade, your profit, on assignment, comes out to 9.1%. If your shares do not get called away, you're long the stock, at whatever market price it trades at, and wealthier by the amount of income generated from the call sale.