Update – Netflix (NFLX) Q4 Earnings Preview

by Dan January 17, 2019 2:15 pm • Trade Ideas• Trade Updates

Netflix (NFLX) will report their Q4 results tonight after the close. The implied one day move is about $29, or about 8%. That can be determined by taking the at the money straddle in the weekly expiration (the call premium + the put premium) and dividing by the stock price. In this case, the Jan 18th (tomorrow expiration put and call) with the stock near $352.50 are each offered at about $14.50 if you bought that, and thus the implied one day move then you would need a rally above $381.50 or a decline below $323.50 to make money.

On January 8th I previewed the quarter (Netflix and Spill?) and detailed what was at that point a very sharp rally from its December lows when the stock was $314. I laid out near term bearish way to play into the day of earnings, with an eye towards adjusting the view the day of:

-Buy to open 1 Jan 300 put for $12

-Sell to open 1 Jan 250 put at $2

Break-even on Jan 18th expiration:

Profits of up to $40 between 290 and 250 with max gain of $40 at 250 or lower.

Losses of up to $10 between 290 and 300 with max loss of $10 at 300 or higher.

Rationale: this trade idea risks 3% of the stock price for a break-even down 7.5% on next Friday’s close following earnings. But this trade idea is really a defined risk bet between now and earnings that the stock will retrace some of its recent move and the profits for the pre-earnings decline will assist in financing a roll of another spread that will merely isolate the earnings event.

Well that was clearly wrong, and I doubled down a bit on last Friday’s Options Action on CNBC when the stock was up 7.5% from that post in a matter of days, but this time focused on giving the trade a little time to play out, using February expiration:

Ok so also wrong (or maybe just early) as the stock ripped another 5% on Tuesday as the company announced a price increase for their streaming service, which investors seemed to really like:

Here were my notes for this trade for last Friday’s show:

With the stock near $352.50, up about $15 from Friday’s close the trade is worth about $11, the issue with the trade now is that the break-even down at $315 is nearly 11% lower than current levels. Despite having one month to get back there, the odds are not exactly great at this point. The options market is saying there is about a 22% chance that the stock will be at $315 on Feb 15th expiration.

At this point, given my recent track record in trying to pick a top on NFLF this month alone, I am right to be a bit cautious, and the idea of throwing good money after bad is at top of mind. I would also add that the company announcing this price increase days before they give results and guidance is likely to be viewed as a sign of strength.

As for the Feb put spread, if I were inclined to stick with it, then it makes sense to adjust the strikes to offer a better chance of success in the event of a 10-15% decline in the coming month, I might consider the following trade idea:

NFLX ($352.50) Buy Feb 350 / 300 put spread for $15

-Buy to open 1 Feb 350 put for $20

-Sell to open 1 Feb 300 put at $5

Break-even on Feb expiration:

Profits of up to 35 between 335 and 300 with max gain of 35 at 300 or lower.

Losses of up to 15 between 335 and 350 with max loss of 15 at 350 or higher

Rationale: this trade idea risks 4% of the stock price for a break-even down 5%. This after the stock has rallied more than 50% since Christmas and is up a whopping 32% on the year.