Monday, April 14, 2014

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

NFLX is trading $331.65, up 1.5% with IV30™ up 1.3%. The Symbol Summary is included below.

Provided by Livevol

UPDATE 4-15-2014

Provided by Livevol

This is an earnings preview note, but as many you know, I am obsessed with NFLX.  I love the story, have made money long and short stock, and can't stop trading it b/c I think the option market has simply lost its mind in terms of pricing volatility.

You can read prior posts below - but please at least read the headlines, as they led us into this pre-earnings note.

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

Back to today:

Let's start with the 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 the stock was one of the best (or possibly the best) performers in the S&P 500 last year, peaked at $458.00 and has fallen sharply over the last month (ish) by more than $100 as a part of the momentum stock deflation.

But I want to focus on the implied volatility, so let's turn to the two-year IV30™ chart in isolation, below.

Provided by Livevol

We can see the ebbs and flows surrounding earnings (the blue "E" icons represent earnings dates).  Note how the peaks had dropped for the prior four earnings cycles, reflecting less and less risk into earnings.

But, times, they are a changing.  Let's turn to this same implied volatility chart but just focusing on the earnings vol.

Provided by Livevol

We can see two phenomena:

1. It's really easy to visualize the falling volatility into the prior four earnings periods.
2. It's also easy to see that NFLX implied volatility is substantially higher than the prior earnings period and we have another week to go before that event, so volatility should continue to rise.

I drew in that light blue line at 80% volatility.  It's a bit arbitrary, but the point is we can see four earnings cycles that hovered around that range (two slightly above, two slightly below).  That's where I think NFLX volatility should rise to into the earnings announcement on 4-21-2014 AMC.

Given the environment we are in, both with respect to US MOMO stocks and in general to the broader market, I just can't fathom an IV less than 70% at the every least.  I mean, how much risk is there in the next earnings release in your opinion?  I'd say, a lot.

Let's turn to the Skew Tab snap (below).

Provided by Livevol

I've included just the Apr 25 weekly options -- the earnings expiration.  I note that the skew looks totally 'normal.'  But.. that seems not really normal to me for NFLX.  With the stock down this much in such a short time, after being up so much in such a short period of time, I would have expected parabolic skew.

In fact, I still think that skew will bend to parabolic as we approach earnings.

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

So, as of today, the Apr 25 weekly $330 strike straddle prices in stock price range of [$286, $374] by that expiry.

  • 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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