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SeanM

NFLX Oct 2015 earnings

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By this time last cycle, we'd already exited our consistently profitable NFLX calendar (a 4 wk version in this instance).  Official entry point for the double calendar was ~1.3% of the stock price (or, $8.40 / ~$650).  The official exit was for a gain of >20% at 1.55% of the stock price.  The DC spread climbed to over 2% leading up to earnings, and many of us booked exceptional profits.

 

So, I'm looking at spreads for the current cycle in this post-split NFLX (as an aside, it took a lot of explaining to my wife why I was in such a bad mood for an entire day upon hearing the news that NFLX would be splitting).  It would be a 5 week setup this time (long Nov, short Oct, ER confirmed for Oct 14th).  The DCs are around $3.90, or 3.8% of the stock price!  If there hadn't been a split, that % would equate to a DC price of $27.30!

 

A few observations (note: all IVs referenced are for the $105 strike, stock is @ $103):

  • IV is much higher for the 1st post-earnings expiry,  the Oct monthlies, at 72%, compared to 45%–50% last cycle
  • The IV drop for the Nov monthlies is much less than typically seen, as IV is still at 60% for that expiry date
  • Maybe most perplexing, even the the options expiring before earnings have an astronomical IV, which, at 52% for the Oct wk 2 options, is higher than post earnings options last cycle

​Unfortunately, these observations lead me not to robotic execution of an assuredly profitable trade, but rather to merely a bunch of head scratching and brow furrowing.  So, I thought I'd start a topic for an idea kick-around.  My initial instinct is to open a 1 wk calendar that straddles earnings due to the high IV of the Oct wk 2 options, which have traded as low as $2.65 today for the $105 call calendars.

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mid around 2.15 on this, is that a good entry?  these calendars have fluctuated a lot in the past so maybe a trade we can enter and exit a few times before the 14th.  

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    • By Kim
      Trade Explanation: For the Volatility Advisory in NFLX, we are selling the Apr 427.5 puts and 520 calls and buy the Apr 425 puts and 522.5 calls for a net credit of $0.91 to open.
       
      Underlying Price: $474.22
       
      Price Action: We are selling this $2.5-wide Iron Condor in the online streaming company for a credit of $0.91. For an Iron Condor trade, we sell an out-of-the-money Call Vertical (520/522.5) and Put Vertical (427.5/425) simultaneously. The company has earnings after the close and the option markets are pricing in a move of 8-9%. We expect the shares to move after the report but are giving ourselves a nice range of $92.5 between the short strikes. We need the shares to continue to trade between our break-even levels of $426.59 on the downside and $520.91 on the upside.
       
      The following was described as a rationale for the trade:
       
      Volatility: Volatility is elevated in the Apr options which makes this trade attractive. The IV percentile rank is elevated at 73% also which also gives us a good opportunity to sell this Iron Condor. We expect volatility to fall sharply after earnings which will contract the value of this short-term neutral position.
       
      Probability: There is an 80% probability that NFLX shares will be below the $520 level and a 80% probability that it will be above the $427.5 level at Apr expiration. This trade offers a good Risk/Reward scenario with the amount of credit collected vs. the probability numbers for this position.
       
      Trade Duration: We have 2 days to Apr expiration in this position. This is a short-term position and time decay will increase quickly due to the time frame and the earnings report.
       
      Logic: We want to take advantage of the increased volatility in our option by initiating this earnings play. Our short verticals are outside of the anticipated one standard deviation move that the options are pricing in so our probabilities are positive. The shares will hopefully remain between our short verticals and we will be aggressive in closing the trade.
       
      My comments:
      It is true that Volatility is elevated in the Apr options, but this is completely normal, considering the upcoming earnings and does NOT make the trade attractive.
        It is also true that volatility will fall sharply after earnings, but it is not relevant if the stock will be trading above the long strikes. In this case, the trade will still lose 100%.
        2 days to Apr expiration makes the trade much more risky because there will be no time to adjust or take any corrective action.
        "80% probability that NFLX shares will be below the $520 level" means nothing when earnings are involved. The price action will be determined by earnings only, not by options probabilities.
        "The shares will hopefully remain between our short verticals" - hope is not a strategy.
        The short strikes are less than 10% from the stock price, which is not far enough, considering NFLX earnings history.
      Now, I want you to take a look at the last 10 cycles of NFLX post-earnings moves:
       

      (This screenshot is taken from OptionSlam.com).
       
      Now, I'm asking you this:
       
      WHO IN HIS RIGHT MIND WOULD TRADE AN IRON CONDOR WITH SHORT STRIKES LESS THAN 10% FROM THE STOCK, ON A STOCK THAT HAS TENDENCY TO MOVE 15-25% AFTER EARNINGS ON A REGULAR BASIS???
       
      The stock is trading above $530 after hours. If it stays this way tomorrow, this trade will be a 100% loser, and there is NOTHING you can do about it. But frankly, the final result doesn't really matter. To me, this trade is simply insane and shows complete lack of basic options understanding.
       
      That said, I'm not completely dismissing trading Iron Condors through earnings. For many stocks, options consistently overestimate the expected move, and for those stocks, this strategy might have an edge (assuming proper position sizing). But NFLX is one of the worst stocks to use for this strategy, considering its earnings history.
       
      Watch the video:
       
       
      If you want to learn how to trade earnings the right way (we just booked 30% gain in NFLX pre-earnings trade):
       
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    • By Ophir Gottlieb
      There is a bullish momentum pattern in Netflix Inc (NASDAQ:NFLX) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market. 

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      Netflix has more than doubled the rest of the high momentum crew. 

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      RISK MANAGEMENT 
      We can add another layer of risk management to the back-test by instituting and 50% stop loss and a 50% limit gain. Note that this is a little different from our normal 40% stop and limit. Here is that setting: 
       


      In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed. 

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      While this strategy had an overall return of 173%, the trade details keep us in bounds with expectations: 
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      Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment. 

      Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
       
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      Implied Volatility collapsed from 130% to 36%. Many options "gurus" advocate selling options on high flying stocks like NFLX or AMZN, based "high IV percentile" and predicted volatility collapse. However, looking at history of NFLX post-earnings moves, this doesn't seem like a smart move.
       

       
      As you can see from the table (courtesy of optionslam.com), NFLX moved more than expected in 7 out of 10 last cycles. For this particular stock, options sellers definitely don't have an edge, despite volatility collapse. If the stock moves more than "expected", volatility collapse is not enough to make options sellers profitable.
       
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    • By Kim
      Here is the answer:
       


      Financial website How Much, took a look at some popular stocks in 2007 to find out how much a $1,000 investment in each would be worth now. It estimates a $1,000 investment in Netflix in 2007 would be worth $51,966 as of October 31 of this year, or more than 50 times as much.

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      Here is an excellent argument from Ryan Vlastelica, MarketWatch reporter:
       
       
      The investing insanity of trying to find the next Amazon has more to say about the same subject:
       

      Excellent advice. Please remember it next time you feel sorry for not investing in Netflix, Amazon or another hot name.
    • By Ophir Gottlieb
      Here it is -- a portfolio of FAANG stocks using pre-earnings trading. A 3:30 video that is staggering and includes some robustness testing.
       
      Reminder that you can sign up for Trade Machine as a Steady Options member here:
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