Setting Up a Great Risk to Reward Trade in AutoZone, Inc. (AZO) for Earnings

AutoZone, Inc. (AZO) is a US based distributor and retailer of auto parts and accessories that sells both through brick and mortar locations across the country and also online via its website. The company also creates and sells automotive diagnostic software that is available under its ALLDATA subsidiary name. At the time of this post (10:30AM CST), AZO is currently trading at 583.27, down 0.80% on the day. The stock printed its 52 week highs of 594.53 off the open today, and even after selling off some going into earnings tomorrow morning, this name appears firmly entrenched in bullish territory, just off the highs for the year and in a strong uptrend off of the 500.00 support level that held in mid-October. AZO is set to report earnings pre-market tomorrow, 12/9/2014.

Over the last eight quarters of earnings data available, AZO has traded with mixed results, moving higher and lower evenly (four of eight quarters), with an average historical directional move of 2.7%. The options market is currently pricing in a move of around 4.25% by December expiration, representing what would be a move of $24.60 in the underlying stock by 12/20/2014. While historically the investor reaction following AZO earnings reports has been mixed, the bullish momentum that is evident in this name via the upward sloping Ichimoku Cloud and continued buying well above all relevant moving averages on a daily chart creates a convincing argument for a sustained move higher before December expiration. I will be looking to get long this name into the earnings release tomorrow.

Trade: Buying the AZO Dec 590-600-610 Call Fly for $1.70
Risk: $170 per 1 lot
Reward: $830 per 1 lot
Breakeven: $591.70 and $608.30