Tuesday, October 25, 2011

Netflix (NFLX) - Stock Collapses on Earnings, Vol Shifts Intra-day

Netflix is trading $77.22, down 35.0% with IV30™ down 4.0% as of ~11:15am EST. The LIVEVOL® Pro Summary is below.


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Netflix, Inc. (Netflix) is an Internet subscription service streaming television shows and movies. The news today is earnings – bad earnings. Here’s a quick snippet to summarize:

Netflix jolted its shareholders again with a third-quarter financial report that portrayed a company in crisis.

The video subscription service's latest blooper reel, released Monday, included an even larger customer exodus than the company had foreseen after announcing an unpopular price increase in July. What's worse, the report contained a forecast calling for more defections during the next few months.

The backlash will deprive Netflix Inc. of some of the revenue that management had been counting on to finance the company's expansion plans while it pays higher fees for Internet video streaming rights. The result: Netflix expects to post losses next year when it starts selling its streaming service in Britain and Ireland. The company didn't offer further specifics besides saying it won't go into any other overseas markets until it's making money again.
Source: AP

Well that’s not very good news... I noticed NFLX early on because of the vol (and obviously the stock move). Let’s start with the one-minute tick chart from today.

The top portion is the stock price, the bottom portion is the Nov monthly expo vol. We can see the stock bounced off of early lows and the vol fell off early morning highs. In fact, the vol was up 10% after the earnings release (for good reason). Now, the vol is actually down on the day, albeit small.

Let’s turn to the Charts Tab (6 months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

I’ve highlighted the annual high, which, unbelievably, was over $300 a share. I’ve also highlighted the collapse today, pushing the stock into the 70’s. On the vol side we can see how the implied has stayed elevated off of earnings, at least for now. Keep in mind the HV is calculated close-to-close, so that blue line will spike massively in tomorrow’s chart.

Let’s now turn to the Skew Tab to examine line-by-line and month-to-month vols.

Note that the red curve is the Oct 28 weekly options. We can see how elevated the front is relative to the back, and again, this is for good reason. Due to the parabolic skew, the upside vol diff is actually gigantic.

Finally, let’s turn to the Options Tab and make a trade.

I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. I will say that calendar spreading the upside feels a touch icky because owning the upside vega given that the stock is going in reverse just doesn't ya know... seem like fun. Of course, if the stock rallies hard to the strike, then, it's awesome. But, given the behavior of the vol and the stock today, an interesting position could bet on vol coming in (going down), while the stock maintains a level above "something". That something could be the short strike in a reverse calendar (or whatever) selling vega but protecting.

This is trade analysis, not a recommendation.

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