Name That Trade – NFLX November Ahead of Earnings

by Enis October 5, 2012 12:10 pm • Commentary

Yesterday’s CotD post focused on NFLX implied volatility rising with NFLX stock.  NFLX is slated to report earnings on Oct 23rd, so November options are pumped ahead of the earnings date (October won’t catch earnings).  The stock has moved -25%, -13%, +22%, and -34% on the last 4 earnings releases, so November implied volatility is pricing in quite a move already.

Here is the options monitor for November expiry in NFLX:  



The at-the money straddle in Nov, the 65 straddle, is priced at around $12.60.  That’s an almost 20% move in either direction from where NFLX currently trades, near $65.  Looking at the historical moves on earnings over the past year, that doesn’t seem like a huge stretch (and being short Nov options has more risk than just the earnings move).  However, has been much less volatile in the past 3 months since last earnings, trading between 52 and 69 ever since the stock puked on earnings in July.  That’s a much tighter range than any previous 3 month period between earnings over the past year.

So NFLX realized volatility has calmed down, and investors and traders seem to have found an area of acceptable value in this range.  But I would be nervous to sell the Nov 65 straddle outright.  Again, the stock has moved more than 20% on 3 of the past 4 earnings reports.  However, the Nov 50 / 80 strangle is trading around $3.  Selling the Nov 65 straddle, and buying the Nov 50 / 80 strangle, would yield a total credit of around $9.60.  That structure would be profitable as long as NFLX stayed between 55.40 and 74.60 by November expiry, with a max loss of $5.40 below $50 or above $80 in the stock.  It’s a decent way to play elevated Nov implied volatility without taking the tail risk of another outsized move in NFLX on earnings.