Update 4/23/2015: NFLX made a huge move to upside after earnings were announced and never drew back to any significant extent. I've exited the position to avoid assignment.
Shares rose by 17.2% over eight days, for a +787% annual rate. The options position produced a -126.4% loss on debit, for a -5,767% annual ratel
The steaming video entertainment company Netflix Inc. (NFLX), headquartered in Los Gatos, California, publishes earnings after the closing bell on Wednesday, and the managed health care company UnitedHealth Group Inc. (UNH), headquartered in Minnetonka, Minnesota, publishes before the opening bell on Thursday.
I shall use the APR4 series of options, which trades for the last time eight days hence, on April 24.
The goal of my trades is to construct direction-neutral positions with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.
NFLX
Ranges
Click on chart to enlarge.
 |
| NFLX at 10:45 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 512.73 | 550.68 | 485.00 |
| Lower | 436.95 | 398.90 | 472.32 |
| Gain/loss | 8.0% | 16.0% |
The Trade
Rarely have I seen such a discrepancy between a narrow chart range and a broad one standard deviation range. I'm ignoring the chart and going with the standard devation.
short the $435 puts and long the $425 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money
| APR4 | Strike | OTM |
|---|---|---|
| Upper | 515 | 76.0% |
| Lower | 435 | 73.0 |
The risk/reward ratio stands at 1.3. The premium is $4.43 ($2.17 for the calls and $0.74 for the puts).
UNH
Ranges
Click on chart to enlarge.
 |
| UNH at 11:02 a.m. New York time, 30 days hourly bars |
I've used the alternate resistance set April 13 for the upper boundary of the chart range
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 123.71 | 128.84 | 121.31 |
| Lower | 113.45 | 108.32 | 114.60 |
| Gain/loss | 4.3% | 8.7% |
The Trade
In constructing the trade, I've had to narrow the zone of profitability considerably in order to get an acceptable risk/reward ratio.
short the $114 puts and long the $112 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money
| APR4 | Strike | OTM |
|---|---|---|
| Upper | 122 | 73.8% |
| Lower | 114 | 74.9% |
The risk/reward ratio stands at 2:1. The premium is $0.66 ($0.38 for the calls and $0.28 for the puts).
Decision for My Account
I've opened positions on both symbols as described above.
-- Tim Bovee, Portland, Oregon, April 15, 2015
References
My volatility trading rules can be read here.
Alerts
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Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.License
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
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