We posted our detailed thoughts on NFLX in our earnings preview this morning. NFLX stock is up 24% since October 9th, a huge run into earnings including today’s 5% move higher to another new all-time high.
This is a wild name with some huge moves in both directions over the past 2 years (8 quarter average move of over 22%). We are not doing any trades ourselves, but here are a couple interesting structures for those currently involved. Both of these structures are net long premium (which can be trecherous in a name like this in front of an event.
The implied move is 11.5%, which is substantial, but far below the 4 and 8 quarter averages, and with the stock at a new all-time high today, there is no upside resistance either. Having said that, these are trades were you’re liable to lose all your premium – in short, situations where you should risk only what you’re willing to lose.
1) For Protection against Long stock, Buy the NFLX ($349.30) Oct25th 335/290 Put Spread for $12.50
-Buy 1 Oct25th 335 Put for 15.65
-Sell 1 Oct25th 290 Put at 3.15
This is a simple hedge position for the earnings event. This is not normally a trade we would do ourselves, but since NFLX is up so much into the event, and given the large prior moves on earnings, this trade offers decent protection in the case of a big down move. If the stock stays above $335 by Friday expiry, you lose your premium, but if the stock does move lower, you protect yourself for $32.50 of the down move, between 322.50 and 290, and lose protection in the area near October’s low, around $290.
2) For Speculative Earnings Bet, Buy the NFLX ($350) Oct 25th 360/390/420 Call Fly for $5.55
-Buy 1 Oct25th 360 Call for 18.00
-Sell 2 Oct25th 390 Calls at 7.40 each, 14.80 total
-Buy 1 Oct25th 420 Call for 2.45
This is a trade playing for an upside move inline with the implied move NFLX, which would be profitable between the range of 365.55 and 414.45. That’s a solid upside range, but with the risk that you lose all your premium if NFLX closes below 360 or above 420 on Friday’s expiry.
And lastly for you brave souls who want to play for the stock not moving anywhere near the implied move:
3) Sell the Move – Buy the NFLX ($350) Oct25 300/350/400 fly for 14.50
- Buy 1 OCt25 300 call for 55
- Sell 2 Oct25 350 calls at 23 (46 total)
- Buy 1 OCt25 400 calls for 5.50
Breakevens – profits between 314.50 and 385.50, losses of up to 14.50 below those levels. Total loss of 14.50 below 300 or above 400. Max profit of 35.50 at 350.
This trade takes advantage of a massive atm straddle in the weekly options. If the move underperforms, this trade has a decent chance of making money, albeit, it probably won’t be at its max gain level of 350. So a high probability of a small gain is probably the best way to think about this trade, with a lower risk of losing everything than an out of the money bet.