Earlier, Dan previewed NFLX earnings. I wanted to look at a few trade structures for those looking to play. Netflix options are implying a 10 dollar move in either direction by Friday’s expiration. That makes sense based on previous earnings moves as well as the range the stock has seen so far in 2016:
So 110 and 90 are the levels to watch based on this week’s straddle. And outside that you have 80 as long term support and around 130 is the all time high. But as I said, the stock has spent a lot of time in that roughly 110 to 90 area this year with 100 as a continuing point of return. And that’s where the stock is into the print. So I wanted to use that information for an educational post on using weekly options around the event.
So What’s the Trade?
It makes sense to use the elevated near term volatility to establish any long term positions in the stock. For instance, for those that believe this consolidation results in a breakout above 110 at some point this Summer, that thesis can be established through a call calendar:
Buy the NFLX ($99.25) July22nd 110/ Sept 105 call calendar for 3.20
- Sell 1 July22ns 110 call at 1.15
- Buy 1 September 105 call for 4.35
Rationale – This trade defines risk t0 about 3.25% in the underlying and has unlimited upside potential if NFLX closes the week below 110. If the stock moves higher on earnings this trade does best with the stock at or around 110 on Friday’s expiration. If that’s the case the July22nd calls can either be closed or left to expire worthless and they can then be rolled to August or September and possibly to a higher strike if the stock is higher. If there’s a massive gap higher the profits begin to trail off above 110, but the trade can’t lose money higher, even if the stock gapped to 250 tonight as it would be worth 5 if both options became 100 deltas.
Implied vol in the weeklies is elevated, about 115 at the money. That means that directional plays near term should look for ways of laying off some premium risk. One way to do that is to target the implied move on the downside with a slightly in the money put butterfly:
Buy the NFLX ($99.25) 100/90/80 put butterfly for 2.70
- Buy 1 July22nd 100 put for 5.30
- Sell 2 July22nd 90 puts at 1.40 (2.80 total)
- Buy 1 July22nd 80 puts at .20
Rationale – This butterfly risks 2.70 with the chance of making up to 7.30 on Friday’s expiration. The max gain occurs at 90 and profits begin to trail off below with losses possible below 82.70 (unlikely). The profitable range of 82.70 to 97.30 on the downside while defining risk to just 2.75% of the underlying is a good risk reward for those that think a move inline with the implied down to 90 is realistic.
Of course the highest percentage trade on the board is selling the move with the thought that the stock could be right where it is on Friday. There are two ways to do that. One is to go outside the implied move and sell a condor:
Selling the move:
NFLX ($99.25) Sell the July22nd 90/85 110/115 iron condor at 1.50
- Sell 1 July 90 put at 1.35
- Buy 1 Jul22nd 85 put for .55
- Sell 1 July22nd 110 call at 1.15
- Buy 1 July 22nd 115 call for .45
Rationale – This fades the implied move and has the chance to make 1.50. However, it risks 3.50 to do so. It can lose 3.50 above 115 or below 85. But it is a high percentage trade as long as you realize the risks of a move of 15% or more on earnings (it is Netflix after all)
Playing for little or no move:
And the final way to not just fade the move but to play for the stock being in or around 100 on Friday’s expiration is to do an in the money fly which is essentially a synthetic condor with 100 as its max gain:
NFLX ($99.25) Buy the July22nd 90/100/110 call butterfly for 2.75
- Buy 1 July22nd 90 call for 10.60
- Sell 2 July22nd 100 calls at 4.50 (9.00 total)
- Buy 1 July 22nd 110 call for 1.15
Rationale – The breakevens on this trade is 92.75 on the downside and 107.25 on the upside. It has the potential to make up to 7.25 while only risking 2.75. Any move above 110 or below 90 and this trade will lose the entire 2.75. So this is fading the move entirely and willing to risk 2.75 that the stock doesn’t move as much as its implied move indicates. This trade has good odds of making something, and could be significantly profitable, but it can also be worthless on a big move.