Tuesday, August 12, 2014

* Netflix (NFLX) - The Volatility Phenomenon is Old, Is it Still Relevant? And Why a Tweet Put Me in a Bad Mood... For No Good Reason.

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NFLX is trading $444.82, down 1.5% with IV30™ down 1.4%. The Symbol Summary is included below.

Provided by Livevol

Update 8-22-2014

Provided by Livevol

That change in stock price in the update really is just a repetition of this incredible volatility phenomenon in NFLX. NFLX has broken an all-time high.

This is a stock and volatility note on NFLX; specifically a note on how low the implied volatility is in the option market.  I saw this tweet today, and while I fully agree that Mark Sebastian and team at Option Pit are rock solid and have been for years, I love their work, the tweet did rub me the wrong way... just a bit... basically because I'm a child.

So what's wrong with it?  Well, firstly, there's nothing wrong with it, this is my ego making up an 'it.'

I have written 14 articles in 16 months on NFLX, most of them surrounding the volatility.  Here's where I usually include a really long list of articles and links, but I won't.

Instead, I'll just include a selection where the title is so obvious, so directed, that we must say, yes, the NFLX vol phenomenon has been going on for a long time, and, allow me to quote myself, "has been one of the greatest trading opportunities ever."

Why am I being so ego-centric about this?

1. I'm honestly having a sh**ty personal day, I feel like crap, so everything seems bigger than it really is... sorry about that. I hope I feel better tomorrow... I really, really do.

2. More importantly: The phenomenon may have seen it's best days. NFLX volatility is still crazy low, but  it might be the case that the money to be made is over and that tweet from ST and the coverage of this phenomenon could be like the stock market hitting an all-time high and all retail investors piling in due to newspaper headlines.

Be. Careful.

The top three posts below, and really number two in particular tell the story... and I do note that my first post on this subject was April 25th of 2013. Here are the selected articles, and believe it or not, that is actually just a 'selection' of many more.

Just read the titles.

NFLX - All-time Highs & One of the Greatest Trading Opportunities Ever

How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind

NFLX - The Option Market is Dead Wrong... Again

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

OK, let's look at NFLX today. First, the stock chart (two-years) is below.

Provided by Charles Schwab optionsXpress

NFLX is up 640% in two-years, though the real story goes back even further, when the firm was actually dangerously close to obsolescence until management just hit a grand slam... actually they have hit back-to-back-to-back grand slams... Loading the bases, and then doing it again, over and over.

My favorite article as to why NFLX is so amazing (thus far) is included below (because you wanted another old blog post).

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

Some of my favorite quotes (some of myself) from that post:

"I wonder if in a few years, the next time we discuss the most powerful distributors in Hollywood, if NFLX is on the list... At the top..."

"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 f*ing incredible."

OK, we get the idea, I really like NFLX management, up to this point.

Let's turn to the IV30™ chart in isolation, below. This is the phenomenon that has all of a sudden become a story, even though it was a story sixteen months ago.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement. Check out where NFLX vol is right now (the yellow circle at the right).  it's the lowest it's been in two-years, and as far as I can tell, the lowest it's ever been.

That is a story.  It was a story every time it did it. Now we must ask: Will NFLX move more than the options imply again?"

My guess: yes.

My position: None.

The Options Tab is included below so we can put numbers to these volatility readings.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$414, $476] by the end of trading on Sep 19th.

  • 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.

That, what I just typed above, is the question.  Thus far, the low volatility in NFLX has been absurdly low.  And yes, it has been one of the greatest trading opportunities in the last decade if not ever.

How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind

This is trade analysis, not a recommendation.

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