Wednesday, October 31, 2012

Netflilx (NFLX) - Vol is Low, But Calendar Diff is Not; Near-term Risk Elevated to Dec.

NFLX is trading $70.21, up 0.9% with IV30™ up 0.3%. 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.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Let's turn to the Skew tab, below.

The yellow curve represents the Nov options, while the green curve represents the Dec options. We can see both a parabolic skew shape across the two expiries, meaning the option market reflects upside risk (potential) and downside risk equally (which is not normal for most stocks), and how the front is elevated to the back. I've included the Skew Tab from 10-25-2012 (two trading days ago), below.

We can see how just a few days ago that calendar diff was nearly non-existent. I do note that the parabolic skew shape is consistent, however. In English, over the last few days the risk reflected in the near-term options in NFLX has increased substantially to the intermediate-term options.  Hurricane related...? I dunno...

Now we can turn to the Charts Tab (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 we can see a lazy last six months, but for anyone that follows this stock we well know how much of a drop this stock has seen in recent years. The price crossed over $300 intra-day in summer of 2011. The 52 wk range in stock price is [$52.81, $131.88].

On the vol side we can actually see how the implied lags both the short-term and long-term historical realized vols as of right now. The 52 wk range in IV30™ is [45.29%, 131.88%], putting the current level in just the 21st percentile.

Finally, let's look to the Options Tab (below).

Across the top we can see that Nov monthly vol is price to 67.41% while Dec is priced to 58.84%. I do note how low the implied is relative to its own annual history yet the vol diff now exists between the font two months.

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