NFLX is trading $471.70, up 7.1% to a new all-time high with IV30™ down 2.4%. The Symbol Summary is included below.
Provided by Livevol
This is a stock and volatility note. I have written so extensively on NFLX that I have fallen in love with the company (that doesn't mean the stock) simply because I think about it so much. The most relevant post is included below:
NFLX, TSLA, TWTR - How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind.
Also highly relevant:
Wednesday, May 21, 2014
NFLX - Is the Option Market Wrong, Again?
The stock was trading at $384, risk was priced low. And yes, the option market was dead wrong again. The stock is nearly $100 higher as of this writing.
I have written exhaustively on how low implied volatility has been, not just in the overall market (i.e. VIX), but also in several individual names. The low implied volatility has proven to be one the greatest trading opportunities ever.
You can read the relevant articles below:
Netflix (NFLX) - One Day of Risk Analysis: Is the Option Market Wrong, Again?
Tesla Motors (TSLA) - Stock Rips, Risk Rises; Has the Correlation Trade Broken Down or Is this a One-day Phenomenon?
Twitter (TWTR) - What Now? Option Market Reflects Low Risk; Last Two-times that Happened, Stock Moved Huge.
And even on the VIX itself:
VIX - 7-year Lows Breached. The Calm Priced into the Market is Stunning. But Did You Know This?
In each of those individual stock cases, the implied volatility (the forward looking risk as reflected by the option market) was dipping in strong correlation with the VIX. Or, in English, the implied volatility was dipping in these stocks just as it was dipping in SPX (VIX is that measure). I postulated in each one of these names, and several others, "has the option market fallen into a dangerous malaise?"
The answer is a resounding yes. While volatility is often times (most times) associated with downside risk, if there's anything we can learn from the current market it's that, upside moves can be as abrupt and as large as downside moves.
The option market was wrong (fact), it is wrong (opinion) and that incorrect pricing of risk (upside or downside) is symptomatic of a market that is pricing in equilibrium (low implied volatility) but is in fact nowhere near equilibrium. When a market mis-prices risk so vastly, it can be an indicator of violent moves ahead.
Nothing in the stock charts point to equilibrium; nothing in those charts points to a settled equity value, and nothing in those charts points to rational reasoning of malaise.
The NFLX all-time stock chart is included below.
Provided by Charles Schwab optionsXpress
We can see that NFLX has a spectacular history. After being the darling of Wall Street in 2011, there was a possibility that the firm was actually going away... But NFLX showed its magnificent power. You can read that post here:
NFLX - Is this the Most Powerful Firm in Entertainment? Some Things I Bet You Didn't Know... But Want to.
NFLX management has continued to prove simply better than the rest every move of the way... even with that silly little hiccup in pricing changes.
- The reality is that the stock moves huge.
- The question is: Why does the option market pretend that it doesn't?
Let's turn to the IV30™ chart in isolation, below.
Provided by Livevol
The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).
So, that red curve is "risk" in the forward looking risk in the stock price per the option market. I'll ask again, what the hell is that measure doing so low?
NFLX is moving like crazy. See the post at the top, see the 10+ posts within the body of that post. See the stock chart. There's nothing low risk about NFLX. Even if you're bullish, upside moves can be as abrupt and as large as downside moves.
Provided by Livevol
Using the at-the-money (ATM) straddle in the July monthlies we can see that the option market reflects a price range of [$447, $503].
Last time I wrote that down the range was [$352, $418]. Here's the proof:
Wednesday, May 21, 2014
NFLX - 5 Years of History, Evolution & Everything You Want to Know. One Day of Risk Analysis: Is the Option Market Wrong, Again?
With respect to the current range [$447, $503]:
- If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
- If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
- If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.
This is trade analysis, not a recommendation.
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