Thursday, April 17, 2014

Netflix (NFLX) - Earnings Preview: My Bologna Has a First Name: c.o.m.p.e.t.i.t.i.o.n.; A Reckoning is Coming with Earnings.

NFLX is trading $343.87, up 3.8% with IV30™ down 1.4%. The Symbol Summary is included below.

Provided by Livevol

UPDATE 4-22-2014 (right after earnings)

Provided by Livevol

NFLX has earnings due out Monday after the close.  This is an earnings note; let's do this.

I have written extensively about NFLX in the past and have included the articles below for the curious reader.  Just reading the headlines does quite some good in terms of remembering the firm's recent history.

Netflix (NFLX) - The Reckoning is Coming with Earnings. Here's the Risk in the Stock Right Now.

NFLX - How the Option Market Totally Blew It... And We Knew it a Month Ago. Momentum Stocks are Deflating... Right Now.

NFLX - Unprecedented Low Risk?... How Many Times Will the Option Market Prove Wrong? And is it Right This Time?

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

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

NFLX - This Newly Minted Giant Has a Big Secret; But It's in the Option Market...

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

NFLX - The New Giant -- Stock Near All-time High but Volatility Collapses to Multi-year Low

NFLX - Is this the Most Powerful Firm in Entertainment? Some Things I Bet You Didn't Know... But Want to.

NFLX - Vol Nears Multi-Year Lows as Stock Explodes; Hollywood Take Note -- Another Shot Across Major Distributor’s Bows

Let's turn to today.  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

So we all know, stock goes up huge (not on chart), falls huge (not on chart), creates original content and saves 'Breaking Bad', stock goes back up (on the chart) huge and recently drops huge (on the chart).

NFLX hit $458 less than two-months ago and is now more than $100 off of that high, although it has bounced off recent lows (and a near-term panic).

Now the question: What next?

Well, the turn down has been in large part due to a momentum stock deflation, so that's not quite company specific.  But, TSLA (for example) is still up 30% YTD.  NFLX is down ~7% YTD, so not all momentum stocks have seen the same overall YTD performance.  Which means, there is something company specific to NFLX... my bologna has a first name: c.o.m.p.e.t.i.t.i.o.n.

A reckoning is coming with earnings for NFLX, and that means risk.

I love NFLX's management.  They proved to be rock starts when they turned a fast sinking ship a few years ago.  They kicked the entertainment industry in the teeth, and exploded the stock price up. Nice job guys.

But... here we go again.  Success breeds competition, and AMZN is here to stay (and others).  So the question as to what's next is one way to look at it.  The other way to look at it is, "how much risk does the option market reflect in the stock price?"  That question, we can answer definitively.

Let's turn to the IV30™ chart (two-years) in isolation, below.

Provided by Livevol

Note that the blue "E" icons represent past earnings cycles and then note the rather hypnotic pattern in earnings vol.


Overall, the implied volatility going into NFLX earnings as of right now is basically the lowest it has been for the last seven earnings cycles, perhaps slightly above the last quarter.

I just think that's wrong.  Ya know... What the hell do I know, but why would there be less risk in this earnings event given the current market than the prior two-years?

That doesn't mean the stock will move huge, but it does mean the risk of that event (in my opinion) is understated by the option market.

Let's turn to the Skew Tab snap (below) which illustrates the vols by strike.

Provided by Livevol

Interestingly, NFLX shows a normal skew shape, which is in fact "abnormal" going into earnings when a stock is down this much in the recent past.

The option market does not reflect as high a probability to an upside move as it does to a downside move.  I'm not sure if I agree, but... we'll see.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

The NFLX $345 straddle is priced at ~$40.

The option market is pricing a range of [$305, $385] by the end of trading on Apr 25th.

Do you agree?

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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