NFLX reports their Q1 tonight after the close.
-The Options market is implying about a 13% move following earnings vs the 4 qtr avg of about 17.5% and the 8 qtr avg of about 16%.
NFLX volatility has been all over the place the past year following their attempted reorganization of their streaming and DVD businesses. You can see a huge spike in implied vol in Sept/Oct when it was announced that they would be splitting up the business, the whole Qwikster thing, then a fall off a cliff in December when CEO Reed Hastings said they screwed up:[caption id="attachment_10805" align="aligncenter" width="594" caption="NFLX IV30 vs HV30 1 year from LiveVol"][/caption]
From a historical perspective implied vol averaged across all months is at pretty low levels now even as the actual vol of the stock is picking up steam:[caption id="attachment_10806" align="aligncenter" width="591" caption="NFLX IV30 vs HV30 2 year from LiveVol"][/caption]
That doesn’t mean that there’s certainty going into this earnings cycle as the Apr27 weeklies are off the charts and May vol is pumped compared to out month: (Apr27 in Red, May in yellow)[caption id="attachment_10812" align="aligncenter" width="574" caption="NFLX monthly skew from LiveVol"][/caption]
If you’re doing a trade in NFLX it’s almost begging you to do it in the form of a calendar. Selling April weeklies to buy June makes sense. June will likely get hit too following earnings, in the range of 25% or more, so I wouldn’t buy it outright
-the street is fairly mixed on the name with 7 Buys, 19 Holds and 9 Sells with an avg price target among 20 analysts polled by Bloomberg of about $97.50.
-short interests sits at very high levels of about 17.5% of the float.
-the stocks almost 50% gains ytd are slightly deceiving when you consider the stock closed down almost 80% in 2011, from its all times highs in made in July.
MY VIEW: If shareholders thought that 2011 was a bad year for NFLX, both from a stock performance perspective and an execution standpoint, then they may not want to hold their breath for the fundamentals to catch up with the stock price (ytd up 48%).
Near term the company appears to have a little momentum on the gross subscriber add front as evidenced from the rebound displayed in the Q4 report back in Jan. But still competition coming from what appears to be every which way, and the company’s desire to develop their own content seems like a fools crusade. Time will tell and in the mean time, the stock will continue to whip around.
The Apr Weekly 100 and 85 puts are very active today with 15k and 10k traded as of 2:30 pm respectively. The third most active option strike is the May 120 calls.
This is a real tough call here, and to be frank the margin for error is very slim. Personally I would love to see this company go away as I think their product is total crap and it should be nothing more than a Tab on Amazon.com.
THE ONLY TRADES THAT MAKE SENSE TO ME IS SELLING SOMETHING, ANYTHING IN THE APRIL WEEKLIES AND BUYING SOMETHING FURTHER OUT LIKE JUNE EXPIRATION.
TRADES TO CONSIDER DEPENDING UPON YOUR VIEW:
If You think the stock is going lower:
TRADE 1: NFLX ($102.10) BUY Apr wkly / June 90 Put Spread for 2.80
-Sell 1 Apr wkly 90 Put at 2.80
-Buy 1 June 90 Put for 5.60
Break-Even on Apr 27th expiration:
If stock is 90 or higher than you own the June 90 Put for 2.80, at that point I would look to sell a lower strike Put to create a Put Spread. In the event of a dramatic move below 90 you would make the difference btwn the Apr weekly puts and the June. Your max risk is 2.80
If You think the stock is going Higher:
TRADE 2: NFLX ($102.10) BUY Apr wkly / June 115 Call Spread for 2.75
-Sell 1 Apr wkly 115 Call at 2.75
-Buy 1 June 115 Call for 5.50
Break-Even on Apr 27th expiration:
If stock is 115 or Lower than you own the June 115 Call for 2.75, at that point I would look to sell a higher strike Call to create a Call Spread. In the event of a dramatic move above 115 you would make the difference btwn the Apr weekly Calls and the June . Your max risk is 2.75
Trade 3: Apr/June Straddle/Strangle swap for .70
For a more sophisticated directionless way to play the disparity in vols between April and June one can sell the ATM April straddle and buy a strangle in June, so:
Sell Apr27 100 strangle at 16.20
Buy the June 95/105 Strangle for 16.90
This play takes direction out of the equation and relies on a not so big move into Friday, the most money is made if they April straddle’s profits are more than enough to make up for the loss in premium due to lowering of Vol in June.
BLOOMBERG EARNINGS PREVIEW:
By Brian Welcher
April 23 (Bloomberg) — Netflix reports 1Q post-mkt.
• 1Q GAAP loss est. 27c/shr (range loss 15c-41c/shr); forecast loss 16c-49c Jan 25
• 1Q rev. est. $865.5m (range $846m-$883m); forecast $842m-$877m
• 1Q gross margin est. 26.6% (range 21.4%-31.5%)
• 2Q GAAP EPS est. loss per share of 2c on rev. $893.4m
• Domestic streaming: 23.4m (9 ests.)
• Domestic DVD: 9.7m (9 ests.)
• International: 2.9m (9 ests.)