Tuesday, August 28, 2012

Netflix (NFLX) - Depressed Vol; Does Vol Trend Make Sense into Sep & Oct?

NFLX is trading $62.90, up 0.8% with IV30™; down 2.5%. The LIVEVOL® Pro Summary is below.


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Netflix, Inc. (Netflix) is an Internet subscription service streaming television shows and movies. The Company’s subscribers can watch unlimited television shows and movies streamed over the Internet to their televisions, computers and mobile devices, and in the United States, subscribers can also receive digital versatile discs (DVDs) delivered to their homes.

This is a quick vol note in a company that has seen its stock price tumble from as high as $300 (intra-day high) to now in the low 60's in just over a year. Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side I note three phenomena:

1. For the two earnings cycles in the last six months, we can see rather abrupt gaps down. Specifically:

4-24-2012: The stock dropped from $101.24 to $87.68 (13.4%) (close-to-close)
7-25-2012: The stock dropped from $80.39 to $60.28 (25%) (close-to-close)

2. The stock was trading over $120 as recently as late March of this year and is down nearly 50% from those levels. The catalysts to the moves down have been earnings (see #1 above).

3. As of late, the stock has found a rather quiet period following the disaster that was the last earnings cycle on 7-25-2012 (earnings were released 7-24-2012 AMC). In fact, the stock tends to have these quiet periods, then abrupt moves (usually down and usually off of earnings).

On the vol side we can see three phenomena as well.  Specifically:

1. The implied is now trading very close to an annual low. The 52 wk range in IV30™ is [45.29%, 93.63%], putting the current level in the 3rd percentile (annual). It's the level of the implied that caught my attention today.

2. The short-term historical realized vol (HV20™) is down to 35.06% and the HV10™ is now down to 29%. In English, while the implied is near an annual low, the very short-term realized vol is even lower. See... a quiet period...

3. The long-term historical realized vol is 68.82%, substantially elevated to both the implied and the short-term historical realized levels.

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

NFLX does tend to have this parabolic skew shape where both the upside and downside are priced to higher vol than the ATM options. This does reflect upside risk (potential) that is higher than a "normal" skew. You can read about option skew here:
Understanding Option Skew -- What it is and Why it Exists .

Finally, let's turn to the Options Tab, for completeness.

Across the top we can see the monthly vols are priced 46.40% (Sep) and 50.29% (Oct). The next earnings release for NFLX should be in late Oct, but after Oct expo. That Dec vol is elevated at ~58% likely due to that next earnings date. An interesting question to ponder is whether the "quiet" period trend for NFLX up until earnings will hold through the months of Sep and Oct -- months which may have elevated systematic risk (regardless of firm specific risk). Whichever way you lean, an interesting trade analysis develops with that depressed vega.

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This is trade analysis, not a recommendation.

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