Earlier this morning I previewed NFLX’s Q1 earnings report due out after the close tonight (below). To reiterate, as usual the set up into the print is quite treacherous for those looking to express a directional view with long options premium, due to the unusually high implied volatility in the name. Looking at weekly options though, regardless of your directional bias, the strikes at or near the implied move of about 15% look like a good sale to finance the purchase of longer dated options.
2 trades stand out to us depending upon your directional bias:
First: Bullish
NFLX (~$174) Buy Apr26th / May18th 200 Call Calendar for 1.90
-Sell 1 Apr26th 200 Call at 3.80
-Buy 1 May28th 200 Call for 5.70
Break-Even on April26th Expiration:
-Max risk is the 1.90 premium that it costs for the spread, Here is how it looks on a payout diagram for a 10 lot spread:
[caption id="attachment_25045" align="aligncenter" width="607"]
200 Call Calendar Risk Chart from TradeMonster[/caption]
Your best chance for success on this structure is if NFLX is up but not significantly through that 200 strike tomorrow morning. Your biggest risk on the structure is if the stock is down significantly, though there is a risk on the upside as well, if the stock rips above 235.
Trade Rationale: This structure takes advantage of an elevated weekly vol sale to finance a May regular that will also take a beating on a vol collapse but has more time until its expiration. This is a good way to play for a move higher in or near its implied move without risking too much from an outright premium long.
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OR
Second: Bearish
NFLX (~$174) Buy Apr26th / May18th 150 Put Calendar for 1.90
-Sell 1 Apr26th 150 Put at 4.00
-Buy 1 May28th 150 Putl for 5.90
Break-Even on April26th Expiration:
-Max risk is the 1.90 premium that it costs for the spread, Here is how it looks on a payout diagram for a 10 lot spread:
[caption id="attachment_25046" align="aligncenter" width="602"]
150 Put Calendar Risk Chart from TradeMonster[/caption]
Best scenario is the stock down but not too far below the 150 strike, as the trade will start to lose money if the stock is below 130. Biggest risk to this structure is the stock going up significantly.
Trade Rationale: This structure takes advantage of an elevated weekly vol sale to finance a May regular that will also take a beating on a vol collapse but has more time until its expiration. This is a good way to play for a move in or near its implied move without risking too much from an outright premium long.
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Original Post April 22nd, 2013: NFLX Q1 Earnings Preview
Event: NFLX reports Q1 earnings tonight after the close, the options market is implying about a 15% move, *which is shy to the 4 qtr avg move of ~23% and the 8 qtr avg move of ~20%.
*With the stock around $170, the at the money weekly straddle is offered at $26, if you bought that you would need the stock on Friday’s expiration to be above 196 or below 144 to make money, or about 15% either way.
Sentiment: Despite the stock’s 85% ytd gains, Wall Street analysts remain very mixed to cautious on the stock with 11 Buys, 19 Holds and 9 Sells with an average 12 month price target of ~$160, below where the stock is trading now. Short interest sits at ~14% which is at nearly the lowest levels in a year.
Price Action / Technicals: The chart is fascinating to say the least, with the range since the Q4 earnings gap representing a fairly well defined support/resistance set up. The lower end of support is the gap level of $140, with $160, the level which it has held since the days after the gap as the line in the sand on the downside.
The major pivot point is marked with a white line, at the 175 level. That was support in February and March, but once it broke, led to a quick move down to 160. Going forward, the key levels to watch are 160 for support, and 200 for resistance. Looking at the 3 year chart below, it shows the stock’s amazing bull run, the quick descent, and now its resurrection. It is clear by the red line that marks the long-term resistance level at $200, that it will take some significant positive fundamental developments to breach this level.
Fundamentals / Valuation: Since early November, when Carl Icahn announced that he had taken a 10% stake in NFLX, the shares have more than doubled. Whatever valuation metrics he used then to value the company then, are clearly out the window now, unless the company sees a meaningful increase in earnings. The chart below of the Price/Earnings ratio over the last 7 years tells you all you need to know. While the company has always traded at a massive premium to other “Net” stocks, the forward PE exploded back in 2011, right before the company had their very high profile earnings decline based on execution issues with their transition away from their core DVD business.
Obviously the plunge in E caused a plunge in P and the P/E went to the moon, and now sits well above average of the last 5 years. The company will need to see a material re-acceleration in earnings for the stock to be considered a reasonable value relative to its growth. For instance, Wall Street analysts expect earnings to grow at 100% a year for this year and next, and not get back to peak earnings of ~$5 until 2015.
Vol SnapShot: NFLX earnings have become a big event over the past year and a half with very high vol and some very big event moves in the underlying. This cycle is no different with weekly vol at 175 and May regular at 84. This is similar to what we’ve seen recently. Here’s a 2 year look at IV30 and HV30:
May vol will get hit pretty hard and could be trading under 50 vol following the event.
Open Interest: The call to put open interest ratio was been around 1.10 for the past month, with no major shifts. Volumes have similarly favored calls, but only by a slight amount. This stands in contrast to 6 months ago, when NFLX put option volume was routinely greater than call option volume, when short interest was more than double where it stands today.
MY VIEW: To be 100% honest here, on a directional basis, this is a fairly treacherous set up for directional players. The options are so expensive, that you could get direction right to the tune of 10-15% in either direction, but be wrong on the structure. For vol players, the moves have been so massive that you would have to be nuts to ” sell the move”, yet there will be a report very soon that murders those who are convinced the stock will continue to move 20% or so every-time they open their mouths on an earnings call.
Here is the thing for those looking to make a contrarian play, the top 6 holders own 50% of the shares outstanding, and with almost 15% of the shares outstanding sold short, the stock will continue to be susceptible to massive short squeezes on the least bit of good news. If the company demonstrates and guides to improved margins, and the notion that they could achieve the expected earnings growth this year and next, the first print tomo morning will be above $200.
But on the flip side, a modest Q1 beat and inline guidance will likely keep the stock range bound possibly establishing a new range below 160 and btwn the Jan gap.
At the moment I don’t see a ton of edge in the options market, but we are looking at a whole host of trade structures, we will post anything that looks attractive.
Expectations -Bloomberg Preview:
ESTIMATES:
- 1Q GAAP EPS 19c (range 6c loss-EPS 35c); Jan. 23, NFLX forecast EPS 0c-23c
- 1Q rev. $1.02b (range $1.007b-1.051b); Jan. 23, NFLX forecast rev. $1.004b-$1.031b
- 2Q GAAP EPS 30c (range 2c loss/shr-EPS 51c)
- 2Q rev. $1.06b (range $1.023b-1.092bn
- 1Q subscriber guidance from 1/23:
- Domestic streaming total subs: 28.5m-29.2m
- International Streaming total subs: 6.6m-7.3m
- Domestic DVD total subs: 7.6m-8.05m
WHAT TO WATCH:
* NFLX 1Q rev., EPS may be at or above high end of guidance as
Feb. debut of House of Cards and mid-March Facebook
integration likely drove NFLX to high end of domestic subs
guidance; cost controls should help EPS: Wedbush
(underperform)
* Free cash flow likely to be negative in 1Q due to
significant cash payments for original content; NFLX likely
to turn cash flow positive again later in 2013: Pacific
Crest (outperform)
* 2Q subs: 2Q likely low point for domestic streaming subs
growth in 2013 as it is seasonally slow period; guidance for
limited 2Q sub growth wouldn’t indicate decelerating
momentum: Pacific Crest
* Despite seasonally slower period in 2Q, NFLX adding Arrested
Development during qtr should help attract new members,
Barclays says (equalweight); says subs growth likely more
challenging in 2H as novelty of original programming wears
off
* Also watch for any color on further international expansion
plans, RBC says (outperform); expects 1Q international
contribution losses of $90m and segment to run at loss
through 2015