Today after the close Netflix reports their Q4 results. The options market is implying about a 10% one day move in either direction, which is a tad shy of the qtr avg move of about 12%.
NFLX is down 30% from its all time highs made in early September, and down 25% since the company issued weaker than expected subscriber growth in their Q3 report in mid October:
The stock has traded in a massive range over the last year shedding between $7 and $10 billion in market cap (current market cap $20 billion) on two occasions.
The five year chart below shows just how important the $300 level is on the downside, the level where the stock topped out back in 2011, and support from early 2014:
Options prices leave little room for error for those looking to express directional views, as implied vol has already reached levels higher than that of its two prior earnings reports:
What that means is February vol, which is nearly 60 now, could be in the low 30’s tomorrow. You have to get direction right if long options. Short vol trades have that collapse as protection but this stock has been crazy in the past on earnings moves so those sorts of trades must be defined risk. So let’s look at some structures:
Potential Trades: We don’t have a strong feel for this one, but my heart is in the “testing the lows” camp. If I were to attempt a bearish trade I would look to sell short dated premium at the implied move and own longer dated puts. For example, the Jan23rd weekly / March 300 put spread (selling Jan23rd 300 put and buying March 300 put) costs about $5.40, that would be the max risk. The max profit would be at $300 on Friday’s close, a move basically inline with the implied move. This is a great trade if the stock falls on the report but holds $300 support. The negative here is if the stock goes higher or breaks $300 hard in which case the $5 is at risk.
On the flip side, playing for a bounce inline with the implied move one could consider the Jan23rd / March 375 call spread which costs about $6. This has similar risk/reward to the put calendar above but is bullish.
For those looking to finance longer dated directional views calendars are the way to do it as they take advantage of sky high weekly premium. The calendars should do their job as long as the stock goes in your desired direction but does not violate the implied move too much. If the scenario played out correctly and you were able to close the weeklies for next to nothing, it would then make sense to further reduce the premium at risk by once again selling an option of the same strike in February to roll the calendar, or of a lower put or higher call strike within March expiration to create a vertical.