Name That Trade – $NFLX: Face/Off

by Dan April 15, 2015 1:37 pm • Commentary

On Monday I previewed NFLX’s Q1 results due out after the close (below).  The implied one day move is now about 9.5%, the April 17th weekly $472.50 straddle (the put and the call premium) is offered at $44.50, if you bought the move and bought the straddle you would need a move above $517, or below $428 to just break-even on Friday’s close, or about 9.5% in either direction.  I know want to offer a few ways to trade NFLX into the print depending upon your directional inclination or current positioning:  

Yield Enhancement vs Long Stock at $472.50:

NFLX Buy April 17th 500 / 522.50 1×2 call spread for even money

-Buy 1 April 500 call for 11.20

-Sell 2 April 522.50 calls at 5.60 each or 11.20 total

Break-Even on April 17th Expiration:

Profits: Gains of stock between $472.50 and $522.50.  Stock called away at $522.50 but have added up to $22.50 in added leverage between $500 and $522.50, with a max gain of $22.50 or almost 5% yield/leverage if stock is $522.50 or higher. (effective sale price of $545 if stock is above 522.50)

Losses: of stock below $472.50, and ratio call spread expires worthless, with no gain or loss.


Great leverage for an existing long that wants to get out of their shares after one final breakout. The ideal situation here is a move to but not above 522.50 as then you retain your shares and have added the yield and have further optionality for even more profits afterwards.


Stock Replacement with stock at $472.50

NFLX Buy April 17th 480/530/580 Call Fly for 11.00

-Buy 1 Apr 480 call for 19

-Sell 2 Apr 530 calls at 4.50 each or 9 total

-Buy 1 Apr 580 calls for 1

Break-Even on April Expiration:

Profits: gains of up to 39 between 491 and 569 with max gain of 39 at 550

Losses: up to 11 between 480 and 491 & between 569 and 580, with max loss of 11 below 480 and above 580

Rationale: If you’ve owned shares for a while and have profits after this recent run-up it may make sense to think about stock replacement. This trade replaces your shares with risk of only $11, which is comforting into a volatile event. The main risk here is a ridiculous move higher above $530 where profits begin to trail off and tail risk of actually losing money above $569. But under most scenarios of the stock higher this trade will make money and has a much better risk profile for concerned long holders.


Protection against 100 shares of long stock at $472.50

NFLX Buy April 17th 470/420/395 broken wing put fly for 14.00

– Buy 1 April 470 put for 20

– Sell 2 April 420 puts at 3.50

– Buy 1 April 390 for 1.00

Breakevens – Losses of up to 14.00 vs gains or losses in the stock above $456. Total loss of hedge vs stock above $470. Breakeven on gains of stock vs hedge at $484, profits in stock above $484. Protection in stock of up to $36 below $456 with max protection at $420 where the hedge saved $36 in losses in the stock. Losses in the hedge below the expected move are mitigated by the broken wing but the hedge does trail off in probability between 420 and 390.

Rationale – This trade gives you protection down to the 200 day moving average of $420 which is also near the expected move. The broken fly aspect on the lower put mitigates a disaster scenario where the stock is down $100 as the broken fly wouldn’t cost you money on the hedge as well.

This type of trade is one based on odds of expected moves. If you want something simpler there is always collars and put spread collars. We looked at those, but in order to get decent protection to the downside a call that seems awfully close to the money must be sold (like the April 500s) and at that point of being willing to get called away in your stock at $500, why still own it?

If you are a longer term holder and don’t mind sacrificing some gains in order to hedge, a simple put spread like the April 470/420 could make sense, but at 17.50 that could get expensive every quarter. That’s why for nervous longs we like the idea of stock replacement with the call fly detailed above.




Original Post April 13th:  Name That Trade – $NFLX: Queued Up

Netflix (NFLX) reports Q1 results Wednesday after the close.  The options market is implying about a 10% one day move which is shy of the 12.5% average over the last 4 qtrs, and below the 13.7% average over its 11 year history as a publicly traded company.  

The stock is up 6% today on an upgrade at UBS from Neutral to Buy (read Barron’s rundown of the note here). While this may be the impetus for the move, I think it is safe to say that the set up into the earnings print is becoming increasingly treacherous for traders as the stock approaches the prior intra-day all time high of about $490 made last September:

NFLX 1yr chart from Bloomberg
NFLX 1yr chart from Bloomberg

The volatility in the stock over the last year, trading as low as $300, and as high of almost $500 shows just how controversial the story is.  Bears point to valuation, costs of original content and an onslaught of impending competition in the streaming tv space, while bulls clearly see a unique property with first mover advantage and an amazing long runway as they expand outside the U.S.

I am fairly mixed on story, valuation is confusing, especially for a nearly $30 billion market cap company that trades 150x expected 2015 earnings, but at a fairly reasonable 4.3x expected 2015 sales.  In the near term the hype around content competitors like HBO towards online streaming, and companies like Apple supposedly in talks to offer a new platform to cord cutters, could actually benefit NFLX given their established brand and offering. (NFLX seems to be in the middle of all of it so far.)

I would add though that investors tend to get a tad worried about the stock when it has a market cap between $25 and $30 billion.  The chart below since Jan 1, 2014 shows the stock’s propensity to sell off above $450, there have been four total selloffs from that area, two of about 35%, and two of about 14%:

NFLX since Jan 1 2014 from Bloomberg
NFLX since Jan 1 2014 from Bloomberg

My crystal ball is in the shop, and I have no idea what they are gonna print. I suspect given the stock’s nearly 20% rally since the lows on April 6th that the implied move of 10% for earnings should not be hard to come by.  If they were to disappoint in a meaningful way I suspect the stock is back at $425 very quickly, while a beat and raise could cause a breakout of epic proportions.

A quick look at the stock’s performance following the last 11 quarter is kind of interesting (circled in yellow crayon).  The one day moves following results in the prior 10 quarters has moved the same way for 2 consecutive quarters consistently over the last two and half years.  There is obviously nothing scientific here, but it could be a reflection of some sort of seasonal or cyclical nature of their subscriber trends that investors haven’t been accounting for:

NFLX price performance the day following earnings over the last 11 quarters from Bloomberg
NFLX price performance the day following earnings over the last 11 quarters from Bloomberg

If you wanted to play what may be trend (or may just be random noise), the stock should rally Thursday. Or maybe the rally into earnings was investors realizing this trend and trying to get ahead of it. (Trading is fun!)

If the stock is going up, it is going through $500, and there will be no overhead resistance. But vol is pretty high. We’re going to look at some trade ideas and will update before the print.