With Amazon.com Inc. planning to unveil its first smartphone next week, prospective customers and options investors have something in common: they’re both lining up to pay for calls.
Contracts to buy Amazon shares are the most expensive since at least 2006 relative to bearish wagers, according to data on six-month options compiled by Bloomberg. Calls betting on a 20 percent rally by October have the highest ownership. The company’s stock has tumbled 17 percent in 2014.
Amazon will introduce a smartphone on June 18, according to a person with knowledge of the matter, that’s expected to ramp up the company’s rivalry with iPhone maker Apple Inc. Investors are betting the device will be a gateway for consumers to access other services and content provided by the company, according to Josh Stewart of Wasatch Advisors Inc.
“The options positioning is all based on the smartphone,” Stewart, a Salt Lake City-based portfolio manager at Wasatch, which oversees about $17.5 billion, including Amazon shares, said in a June 9 phone interview. “It’s another kind of pillar for the whole Amazon ecosystem to stand on. Call volume is up and people are getting more and more bullish.”
Puts betting on a 10 percent drop in Amazon shares cost 0.93 point more than calls betting on a similar-sized gain, data compiled by Bloomberg on six-month contracts show. That’s the smallest spread since at least February 2006. In the past three years, the puts have been 3.54 points more expensive than puts on average.
The four most-owned Amazon options contracts are betting the company’s stock will rise. Contracts expiring in October with a strike price of $400 had the highest open interest, followed by bullish bets with the same exercise price expiring in January 2015. The company’s shares increased 1 percent to $335.78 at 9:32 a.m. in New York.
Mary Osako, a spokeswoman for Amazon, didn’t respond to a phone call or e-mail requesting comment on the company’s options trading.
Amazon fell as much as 28 percent this year, sending the stock to an eight-month low on May 8, amid a selloff in technology firms. Amazon trades at more than 500 times reported profit, compared with 17.9 for the Standard & Poor’s 500 Index.
“You saw Amazon and a lot of tech stocks get hit pretty hard and bottom out, and now they’re starting to bounce back as the market makes new highs,” Stephen Solaka, who helps oversee about $150 million as managing partner of Belmont Capital Group in Los Angeles, said in a June 9 phone interview. “We’re seeing people play the options as a way to get long.”
Amazon posted on Twitter earlier this month that it was holding an event in Seattle for a product unveiling. The post included a picture of a black, thin device with Amazon’s name in silver emblazoned on it. The company is increasingly going head-to-head with Apple in devices such as tablets and in Web services including online entertainment.
The smartphone market grew 21 percent last year to $338.3 billion, according to researcher IDC. The market by shipments in the first quarter was dominated by Samsung Electronics Co., which has 31 percent market share, and Apple, with 15 percent.
A smartphone would give Amazon a wider range of hardware devices to bolster its diversification into digital books, songs and movies. The company’s gadget lineup already includes the Kindle e-reader and Kindle Fire tablets.
Amazon has shown a willingness to lose money on hardware with the goal of later making it back from sales of entertainment content like videos and music, or purchases from Amazon’s store. For some analysts, the company’s commitment to products with low profit margins is a drawback.
“The continued significant investment cycle is not showing any signs of letting up,” Aaron Kessler, an analyst with Raymond James & Associates, wrote in an April 25 note. “Amazon Web Services is likely facing increasing price competition.”
Amazon has been pouring cash into new initiatives. First-quarter expenses rose 23 percent, the same rate as revenue growth. Kessler cut his rating on the shares to outperform from strong buy after the company announced quarterly earnings on April 24.
To Jason Helfstein, an analyst at Oppenheimer & Co., options traders are speculating on a snapback in Amazon shares after the losses earlier this year. The average 12-month share-price forecast among 39 analysts that cover the company is $419.85, implying a 26 percent increase, according to data compiled by Bloomberg.
The Chicago Board Options Exchange Volatility Index, a gauge of options prices known as the VIX, closed 1.4 percent lower yesterday at 10.99.
“A large amount of the options positioning has to do with the pretty big decline we saw in the shares earlier this year,” Helfstein, who has an outperform rating on Amazon, said in a June 9 phone interview. “The perception is that the stock is pretty well-positioned for a pickup at some point.”