Earnings Trade in NFLX

• stevenplace
• January 26th, 2011

This trade’s one of the patented Steve-Place-awesome-earnings-vol-trades.

Overall trend is up, but has been rounding out and price action has been rangebound for about 3 months now. Essentially, no strong moves since November. Most likely we’ll get a decent move going into earnings.

The current price over strike for NFLX is about 10%– that’s what the options are pricing in. Here’s what it looks like on the chart:

That seems like a reasonable expectation within the next 2 days, right? Well, hold on a sec… the average percentage move close/close post earnings is about 16.28%, much higher than what the market is expecting!

The thing that the vol sellers have going for them is those percentage expectations were done back when NFLX was trading at 50, 87, 119, and 153– so the absolute movement is fairly hot compared to those prices.

Here’s the vol skew, this is not surprising:

Holy vol pump, Batman! This may look like a trade ripe for a double calendar, but as JW Jones points out, the vol sales you make in January have to make up for any vol crush you have in February.

So we’ll do something like a double calendar, but with a twist that will protect us against the vol crush.

Subs, the trade and management are below:

Instead of buying the february vol, we are buying march, which has a lower implied volatility.

Here’s the risk profile:

Now don’t get your hopes up about pulling 1k out. Essentially what has to happen is the premiums in the January options that you sell have to make up for the premiums lost in the March options you buy, plus extra. We did a very similar trade in AAPL last week so you should know that while it was profitable it wasn’t a homerun as the risk profile suggested.

In terms of management, ideally we want out of this by friday but we can roll to another calendar and/or iron condor if we need to.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus