Tuesday, January 21, 2014

Netflix (NFLX) - Earnings Preview: "Less Risk in This Firm Now than In the Last Two-Years." Do You Agree? I'm Not Sure I Do.

There is an update to this blog after earnings here:
1-23-2014: Netflix (NFLX) - Earnings Blowout; But the Story is Not Over. Stock is Still in Play.

Original post (1-21-2014):
NFLX is trading $322.96, down 2.1% with IV30™ up 5.2%. 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.

This is an earnings preview note on NFLX which are due out tomorrow (12-22-2014 AMC) -- one with some teeth to it. It's also a follow up to a prior article. You can read that post by clicking on the title below.

12-27-2013: Netflix (NFLX) - UPDATE: The Giant Killer is a Giant, But the Option Market is Still Asleep. What Happens When it Wakes Up?

From the title, you can guess the content. Here's a quick snippet then we'll dive into earnings analysis.

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.

At the time  NFLX IV30™ was 33.76%.  While the volatility is remarkably higher now, that's actually normal -- earnings are due out tomorrow. The oddity is that the volatility is still so low.

Let's turn tot the Charts Tab (two-years) is 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 incredible run that NFLX has had - I believe it was the to performer in the S&P 500 last year.  I have written extensively about NFLX and have included those posts below.  But when it comes down to it, I am focusing on the volatility, right now.

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

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

Let's turn to the IV30™ chart in isolation, below and get to the real story surrounding earnings.

Provided by Livevol

I have highlighted the IV30™ on the day of earnings for NFLX for the last eight quarters (including today). Those little blue "E" icons represent earnings dates.  I note two things:

1. The level of the implied for the last seven earnings reports has been relatively stable.
2. The implied volatility today is substantially lower than any of the other dates in the last two-years.

In order to get an even cleaner picture of the implied volatility ahead of earnings, I have posted the same image below, but cleaned out the non-earnings dates.

Provided by Livevol

We can see now how depressed the volatility is in NFLX relative the prior earnings events (that horizontal yellow line allows for easy comparison).  So what?

Well, here's the story, and it's a simple one but with broad impact.:

The option market reflects lower risk into this earnings release for NFLX than it has over the last two years.

The last seven earnings vols have been:
1-22-2014: 54%.

One of these is not like the other

If the option market is right, NFLX will stay in a tight range off of the news.  If the option market is wrong, owning vega could be a huge winner.  Let's put numbers to it by turning to the Options Tab below.

Provided by Livevol

Looking at the Jan 24(Weekly) options, the $322.50 strike is the ATM straddle to examine.

The option market reads:

NFLX will be in the range [$287.80, $357.20] by the close of trading on Jan 24th.

Wanna bet?  It's a risky one.  I've seen the option market in a general malaise for the last two months with some rather odd mispricing.  You can see TWTR as one example:

Twitter (TWTR) - UPDATE: How the Option Market Totally Blew It, And We Knew it Two-Weeks Ago.

But this is trickier -- this is earnings based. It's a single event.. IMHO, that means it's a coin flip.  What do you think?

This is trade analysis, not a recommendation.

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1 comment:

  1. hey i think your earnings date near the top of article is wrong it say s dec not jan :)