Event: Netflix (NFLX) reports Q1 earnings Monday night after the close. The options market is implying about an 10% one day move. How do we figure that? Well with the stock at $111, the April 22nd weekly 111 straddle (the call premium + the put premium) is offered around $12, divide that by $111 and you get 11% of the stock price, assuming that most of that weekly move is related to the earnings event, you get about a 10% implied move in either direction for just earnings.
If you bought the weekly straddle because you were convicted that the stock would move at least in line with the implied move but unsure on direction, then you would need a move above $123, or below $99 on next Friday’s close to make money.
The average one day move over the last 4 quarters has been about 12%, the average over the last 10 years has been about 13%.
The one year chart below shows the stock’s massive trading range, from its year ago and 52 lows near $67, to its all time high at $133.50 in early December, to its 2016 lows just above $80:
While the stock has historically moved a ton, last quarter’s post earnings movement might have caught options traders off sides. The stock was initially down about 10% from the prior day’s close, to actually going green at one point to basically closing unchanged. If you were long the implied move, then you got absolutely crushed, one reason why the implied move is well below the 14% on the day of their Q4 report in mid January:
On more reason for the lower implied move to last quarter is the relative calm in the stock. The one year chart below of 30 day at the money implied volatility (the price of options, blue below) vs 30 day realized volatility (how much the stock has moved over the period, white below) shows realized vol at levels not seen since mid July 2015, with implied vol well below the levels in mid January 2016 prior to Q4 results:
Sentiment remains fairly mixed in NFLX, with 12% short interest, and Wall Street analysts who are generally leaning bullish with 25 Buy ratings, 17 Hold ratings and only 4 Sells with an average 12 month price target below the 52 week highs at $123.
We will take a closer look at potential trades prior to the event on Monday.