Last week’s post featured an introduction to the world of volatility trading. We discussed the differences between buying and selling premium in low versus high implied vol environments. In the former case, you might purchase strangles or debit condors. In the latter case, you could sell iron condors.

I used AMZN and BA for examples of both scenarios. Today I want to follow-up and show the results on Amazon.

Volsplosion

Here is the original chart showed last week to highlight the volatility compression in Amazon that hinted at a coming expansion:

A stock providing this type of “coiled spring” pattern presents an exciting opportunity for a long volatility, bi-directional trade. But just having a compelling chart setup is not enough. We also needed cheap options as revealed by low implied volatility readings. At the time I took this snapshot, AMZN implied volatility rank was hovering at 21%, the lowest reading since last June.

Together, these forces combined to make buying debit condors an attractive proposition. The high price tag of Amazon shares made this strategy better than a long strangle.

I tracked a so-called debicon over the past and wanted to report on its progress.

The Bet

On February 26th – which ended up being too early of an entry – with AMZN stock trading for $1,636, we purchased the April 1575/1615/1680/1720 Debit Condor. Broken down the trade consisted of buying the April 1615/1575 bear put spread and 1680/1720 bull call spread for a net debit of $28.25. The hope was to have AMZN either ramp above $1720 or sink below $1575.

Again, per the volatility squeeze, we were expecting the pendulum to soon swing back from compression to expansion. For the first week or two, AMZN remained neutral, but finally this week we saw the anticipated breakout.

With AMZN now trading at $1818, we’ve seen an 11.1% rally. Fortunately, the implied volatility rank has also lifted alongside the stock price, from the 19th percentile to the 29th.

Big price jump + modest IV bump = profits for bi-directional strategies.

Meanwhile, the April 1575/1615/1680/1720 Debit Condor has grown in value from our original entry price of $28.25 to $35.70. That represents a $7.45 gain or 26% which is fantastic for this type of trade.

To make sure nothing was lost in translation, here is what the risk graph of the position looks like. I’ve labeled the movement in the stock price.

Can you tell in the risk graph how this has become a bullish trade? Even though it started as a bi-directional strategy, it became directional once AMZN picked a direction for its breakout. At this point the bear put spread is worth little and the bull call spread is worth a lot. That means it’s the bull call that is now driving the performance.

So, manage it like any other bullish trade. If AMZN keeps trucking higher, then let ‘er run. If the now slightly extended stock finally encounters profit-taking, I would seriously consider exiting the position to lock-in the gains.

Because implied volatility wasn’t included in the prior chart, I wanted to show it here: