Friday, December 27, 2013

Netflix (NFLX) - UPDATE: The Giant Killer is a Giant, But the Option Market is Still Asleep. What Happens When it Wakes Up?

This is a quick update to the article published on 12-21-213:
Netflix (NFLX) - The Giant Killer is a Giant, But the Option Market is Still Asleep. What Happens When it Wakes Up?

I have actually included the entire post below, with one update, which is today's (12-27-2013) intraday Symbol Summary:

Provided by Livevol

The premise of the first post was simply that the implied volatility for NFLX felt pretty low reflecting, potentially, not enough risk in the share price in the near-term.  Today we already see that the price is $6.28 lower and the volatility is 3.26 vol points or ~10% higher.


From 12-21-2013

NFLX closed Friday trading at $375.67, down 0.3% with IV30™ down small... again. The Symbol Summary is included below.

Provided by Livevol

Netflix, Inc. is an Internet television network with more than 33 million members in over 40 countries. In the United States, the Company’s subscribers can receive standard definition digital versatile disc (DVDs), and their high definition successor, Blu-ray discs (collectively DVD), delivered quickly to their homes.

I have written extensively on NFLX -- it really is one of my favorite subjects and favorite companies (that doesn't mean I have a position).  This option market has continued to show incredibly low risk n the stock and we have yet again hit another multi-year low in the implied.

Before I get started on the "today," let's look at the prior posts with some snippets.   You can read any post by simply clicking on the title:

11-26-2013: Netflix (NFLX) - This Newly Minted Giant Has a Big Secret; But It's in the Option Market...


Provided by Livevol

10-15-2013: Netflix (NFLX) - How a New Industry Giant Shows 'Cheap' (?) Volatility into Earnings; Did You Know This?

9-18-2013: Netflix (NFLX) - The New Giant -- Stock Near All-time High but Volatility Collapses to Multi-year Low

9-10-2013: Netflix (NFLX) - Is this the Most Powerful Firm in Entertainment? Some Things I Bet You Didn't Know... But Want to.

4-25-2013: Netflix (NFLX) - Vol Nears Multi-Year Lows as Stock Explodes; Hollywood Take Note -- Another Shot Across Major Distributor’s Bows

This is a volatility note.  The first time I note low volatility in NFLX it was trading $216 at 46% vol. Today it is $375 at 33.76% vol. Here is a quick review from the most recent posts, which is relevant to this note which surrounds substantially depressed volatility in the option market.

So why is this happening to NFLX? Well, a lot of reasons, but one of the biggest is pretty simple:

NFLX now decides which TV shows are hits. Yeah, that's right. For example, the AMC original show Breaking Bad, the highest rated TV show ever by meta critics, was at a point after season 4 where its record viewership for any one episode was ~1.5 million people. That's actually very low.

An agreement was struck to put all of the "Breaking Bad" old seasons on NFLX for free (everything is free on NFLX with the monthly subscription). The first episode of season 5 aired to 3 million viewers (so a 100% increase). Then, the first episode of season 5 part II aired to 6 million viewers (NB: My numbers may be off wrt which season the bump(s) happened, do some fact checking before quoting me). OK, OK, is this really b/c of NFLX? Well, here's a direct quote from the show's creator, Vince Gilligan:

"I am grateful as hell for binge-watching. I am grateful that AMC and Sony took a gamble on us in the first place to put us on the air. But I'm just as grateful for an entirely different company that I have no stake in whatsoever: Netflix. I don't think you'd be sitting here interviewing me if it weren't for Netflix. In its third season, Breaking Bad got this amazing nitrous-oxide boost of energy and general public awareness because of Netflix."

Why does this matter? How about this... Instead of NFLX paying for content, the content providers may pay NFLX to air their shows. That's incredible.

Add to the fact that NFLX now has critically acclaimed original content -- that's content available ONLY on NFLX ("House of Cards" and "Orange is the New Black" are two of them) and what we're slowly finding here is that NFLX may become the most powerful content distributor for TV (the profitable part of the entertainment business) on the planet.

Don't laugh or roll eyes, it's happening right now. FOX is tying the same game as AMC did with "Breaking Bad" with their sitcom "The New Girl." And you know what?... it's working again...

Now NFLX does have competitors, namely AMZN (I know they're not the first name to come up from entertainment industry folks, but the entertainment industry is wrong -- AMZN is the risk for NFLX). Another risk is the content creators using their own channels (no pun intended)... but that doesn't seem to work so far (and yeah I know what Hulu is and who created it).

Here's more news, from CNBC a day after I posted this article:
Groundbreaking news that Virgin Media is bringing Netflix directly to its set-top box in the U.K. in effect elevates Netflix to the status of a new cable network-a benefit for a cable company and beyond being an upstart threat to cable.

The stock's nearly 220 percent gains this year have been driven largely by the success of its original content deals, which have helped add new subscribers, giving Wall Street confidence that exclusive originals will continue to deliver.

(More from Julia Boorstin: Is Apple's iRadio a Pandora killer? )

Virgin's parent, Liberty Global (LBTYA), gained just under a percentage point on Tuesday's news.

Virgin Media's partnership with Netflix is the first time a cable operator is bringing the streaming service directly to the set-top box. Other cable operators-like Comcast (CMCSA)-allow users to access Netflix through Internet-connected set-top boxes-but this is the first time a cable channel has directly made a deal with Netflix to treat its content just like that provided by cable channels like HBO (owned by Time Warner (TWX)) and Showtime (owned by CBS (CBS)). (Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and

Virgin will integrate Netflix with its television content so it's easy to seamlessly browse and search across both TV and streaming content.

Source: CNBC via Yahoo! Finance Why Netflix is at a new all-time high, written by Julia Boorstin.

On 10-15-2013 I noted that the volatility into earnings for NFLX was quite low.  The stock did in fact go from ~$355 to~$322 in a single day (while in that same day hitting $389, then dropping $65 intra-day). 

So the stock is up huge,the importance of this firm in the industry is up huger and the valuation proves it.  We're talking about a $21 billion firm now.

But here's the the thing, and there's no way around it.  The higher NFLX stock goes and the more power it has in the industry, the greater the potential fall.  I am a huge fan of NFLX and their management team's ability to resurrect a firm that many thought was dead to an incredibly powerful "new" firm. But, at these valuations, there is risk.  Also, there is substantial risk of higher valuations.

While $22 billion is a big firm, why can't NFLX be worth $100 billion?  So, I say, there is risk to both sides in this stock, yet the option market tells me I am wrong... and here's why...

Today (12-21-2013)

The two-year Charts Tab is included below.  The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see the remarkable run up from ~$55 to now $375, and all of this after the went from $10 to $300 and then back to $50.  As I have said several times, the management team at NFLX absolutely shocked the world twice.  First to become a giant, then to recover from the ashes to become an even bigger giant.

But the option market continues to tell a story that does not seem to be true.  And here it is... Let's turn to the two-year IV30™ chart below, in isolation.

Provided by Livevol

What we see how NFLX implied volatility continues to drop to new multi-year lows.  I have drawn that yellow horizontal line back two-years to illustrate the level of the current implied.  I wrote last time, there were two few mitigating factors:

1. The market wants to go up right now, it just does... So volatility (VIX) is low.
2. We're heading into Thanksgiving; a sleepy time not just for our grumbling tummies but also for the market at large.

But #2 isn't relevant anymore. The IV30™ is now based on Jan expiry.  And, yes, a part of Jan expiry covers Christmas / Hilidays, etc, but Jan expiry is Jan 18th.  That ain't the Holiday season anymore.

Last time I also wrote: "[H]ere's the fact that takes that mitigating factor stuff and throws it out the window.  Jan' 14 volatility is almost equally as depressed.  Yeah... it's true..."

Yeah, now we're in Jan expiry, and the vol is even lower.  I don't know if NFLX is going higher or lower, or if the market is going higher or lower, but this does not feel like a time when NFLX the company in and of itself is facing the lowest risk it has in the last several years.

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

Provided by Livevol

We can see Jan'14 volatility is priced to 32.75% (the last post in November it was priced at 36.49%). We can see that Feb vol is considerably higher and that's due to earnings coming out at the end of Jan (but after Jan expiry).

Let's take one last look at volatility in a slightly different way -- this time, the skew.

Provided by Livevol

Check out how differently Jan skew is shaped from from Feb skew.  Feb shows a much flatter shape, reflecting closer to an equal likelihood of an up move or a down move.  Watch that Jan/Feb skew difference.  The Feb calls are substantially more expensive (in terms of volatility).  If you believe Jan is truly a quiet period for NFLX (I mean a really quiet period), a calendar spread would off set a Feb call purchase but in the oddest way -- selling multi-year low vol to purchase elevated vol.  Not exactly options 101 trading, but hey, this is NFLX, we are way passed options 101 trading.

Please note, this is in no way advice or a recommendation. I'm pointing out facts. NO TRADES.

This is trade analysis, not a recommendation.

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