Trade Update Oct 26th, 2012, 12:45 PM EDT: NFLX stayed within the 55 to 75 range that I had laid out when I posted this “Playing the (Large) Range” traded on October 9th. With the stock now rallying back to near the $65 level (where I would have my max profit), my risk/reward for holding this trade is starting to diminish. I have 3 weeks of potential decay left, but with the structure priced at $6, and the market feeling more volatile by the day, I’m going to take my gains on this one.
This trade was a good example of not forcing a directional view, but taking advantage of the market’s future expectations of volatility. We plan to do more of these trades in the future.
Action: Sold to close NFLX ($62.15). Bought the Nov 65 straddle at $6.95 to close, and sold the Nov 50 / 80 strangle at $0.35.
Closed structure for net debit of $6.60, for a gain of $3.26
-Bought the Nov 65 call at 1.98
-Bought the Nov 65 put at 4.97
-Sold the Nov 80 call at 0.10
-Sold the Nov 50 put at 0.25
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Original Post Oct 9th, 2012:
Netflix has been quite a mover this year. I’ve written about the streaming giant several times in the past few months. I mentioned some potential business headwinds that had weighed on the stock since the spring, including AMZN competition this year and potential AAPL competition next year in my post in August. Last week, I looked at the rally in NFLX implied vol along with the rally in the stock in this Chart of the Day post. Finally, I posted a potential trade idea in my Name That Trade post on Friday that took advantage of that elevated implied vol.
So far this week, NFLX has rallied 10%, and today sold off almost the entire move. Not surprisingly, implied vol has moved even higher than when I looked at NFLX on Friday, as realized volatility is now much higher after the past 2 days’ price action. NFLX started the year at $69.29, where fund managers go from positive to negative on holding NFLX for the year. Though the stock has shown a large amount of volatility, that level has acted as a sort of magnet for the stock.
I still view the high implied volatility as offering an opportunity, and I’m going to pull the trigger on the trade today, with implied volatility up again.
TRADE: NFLX ($67.30) Sold Nov 65 straddle and bought Nov 50 / 80 strangle, collected $9.86
-Sold 1 Nov 65 call at 7.85
-Sold 1 Nov 65 put at 5.55
-Bought 1 Nov 50 put at 1.04
-Bought 1 Nov 80 call at 2.50
Break-Even On Nov Expiration:
-Profits if stock between 55.14 and 74.86 on Nov expiry, with max profit of $9.86 with stock at 65
-Losses of up to $5.14 between 50 and 55.14, and 74.86 and 80, with max loss of $5.14 if stock below 50 or above 80 on Nov expiry
Trade Rationale: I think NFLX has found a range of value where bulls and bears are equally matched, and implied volatility is pricing in a repeat of the past 4 earnings reports, which have seen huge moves. Based on the value in the name down here, countered by the increasing competition, I think NFLX options offer a good way to play for a non-event over the next few weeks, particularly with risk/reward at 2 to 1 in my favor.