Update: NFLX Earnings Tonight and a Bearish Structure with Almost 9 to 1 Payout if the Stock Down In Line with the Implied Move

by Dan July 26, 2011 10:20 am • Commentary

Update: yesterday before the bell I reiterated my quick bearish thesis on NFLX.  I did not want to commit a lot of premium to a punt before earnings, but I wanted to play.  Butterflies can be difficult and expensive to manage and put on, but some times, when you have an inclination on a target price and and an event that can serve as a catalyst it can be a useful low premium, high potential reward, structure.

Mysteriously the stock is down almost 10% exactly inline with the implied move in the options market.  The weakness is a result of Q3 guidance that was below wall street estimates as a result of churn form new pricing plans….most analysts suggested that the company was being conservative…..only time will tell, but with a stock like this that is priced for perfection, near-term caution could be prudent.

Trade Management: yesterday I paid 1.10 for the NFLX july29 265/255/245 Put Fly….this is now worth about 3.00…..the bid/ask with stock at 255.40 is 2.95 at 3.40……the maximum gain on Friday’s expiration is 8.90 if the stock is at 255.  The likelihood of that at this point is a coin toss, the July 29 255 line is basically a 50 delta with the stock at 255.  At some point today the stock will settle down and volatility should settle a bit and the two 255 puts that you are short should start to help the value of this spread as volatility decreases.

I am going to wait a bit and see if the stock settles down in between 250 and 260 and at some point make an assessment about what I am risking vs what left I can capture in the spread if I wait till Friday’s close.  Stay tuned, but remember if you take profits in a spread like this always use limit orders.





Original Post July 25th 2011;

NFLX $282

-company reports their Q2 earnings tonight after the close.

-options market implying about a 10% move which looks a little cheap to the ~13.5% average move of the last 8 quarterly reports.  [private]

– stock is down about 8% from the all time highs made earlier in the month that followed the company’s subscription price hikes.

-Technically, when you look at the chart below, there is a very interesting pattern that emerges……6x this year prior to the recent sell off from an all time high, the stock bases, makes new high sells off and then does it all over again.

[caption id="attachment_3458" align="aligncenter" width="300" caption="1 Yr NFLX chart provided by Bloomberg LP"][/caption]


This appears to me to be a very trade-able pattern if you look for ways to define your risk…….As readers of this site know I am not a fan of this company or their products and feel that at some point in the next 10 years they will go the way of blockbuster.  But if you have any reason to be bullish and think that this pattern persists than now is as good of time as any.

MY VIEW: going against my better judgement to avoid the name I want to make small defined bet into earnings that the company changed subscriptions because they “NEED” to, due to growing competitive threats.  I am going to Use July 29th weekly options and buy the move.  But I am going to pick a direction and that is down.  I am playing for a move back to 255, which is about 9%/

TRADE: NFLX $282 Buy July 29th 265/255/245 Put Fly for 1.10

-Buy 1 NFLX July 29 265 Put for 6.57

-Sell 2 NFLX july29 255 Puts at 7.14 (3.57 each)

-Buy 1 NFLX July29 245 Puts for 1.57

Break-Even this Friday Weekly Expiration:

Above 265 lose 1.10 in premium, btwn 263.90 and 255 make up to 8.90, at 255, make full 8.90…..

Btwn 255 and 245 pay out trails off and below 245 lose 1.10 in premium.