Chart of the Day – NFLX Implied Vol Jumps with Stock

by Enis October 4, 2012 2:44 pm • Commentary

The normal relationship between stock price and implied volatility is an inverse one.  VIX generally moves up when SPX index price moves down, and vice versa.  For the large majority of individual stocks, this holds true as well.  In fact, it holds true for the majority of assets, since volatility on the way up is generally lower than on the way down.  As the old saying goes, assets take the escalator up and the elevator down.

Someone asked about our thoughts on NFLX after a very strong 2 day run, and a strong week overall, up almost 25% since Friday.  The options market has recently shown bizarre behavior in NFLX.  Here’s the chart of the underlying stock price (red line) vs. the 60 day implied vol (yellow line) in NFLX over the past 6 months:



What I refer to as bizarre behavior is the fact that NFLX implied vol has often moved higher as the stock price has moved higher, contrary to normal implied vol behavior.  I specifically used the chart of 60 day implied volatility to reduce the impact of implied volatility rallying into earnings, though that still plays a small role (you can see the small spikes right before earnings, then the steep fall after the earnings event).  In the case of NFLX, the stock has fallen hard on both of the last 2 earnings reports, in April and July, and the implied vol crush occurred after earnings as well.

But the interesting action is on the 2 rapid moves higher in the stock, the first at the start of July, and the second this week.  In both cases, it’s apparent that traders are reaching for calls, moving implied vol higher as the stock moves higher.  In July, earnings deflated those upside expectations.  NFLX earnings will be the week after October expiry.  Traders this week are bidding up calls again, not expecting a repeat of July.