Wednesday, November 18, 2015

NFLX Analysis

Update 1/15/2016: I have exited the NFLX diagonal entirely for a small profit. My judgement of the broad market is mid-term bearish, and I see no need to hang around and take the loss.

The exited the long leg for $8.80 per contract, a loss on debit of 52.5%.

Shares declined by 13.4% over 58 days, or a -84% annual rate. The options position -- the long leg and the short legs -- produced a 2.4% yield on debit for a +15% annual rate.

A list of the short-leg positions:

NFLXdiagonal, short leg
option description key: long/short, call/put, strike, series

The video entertainment company Netflix Inc. (NFLX), headquartered in Los Gatos, California, closed above its 20-day price channel on Tuesday. With a tendency toward whipsaws and low implied volatility relative to its range for the past 12 months, NFLX is a candidate for a time spread, such as a net long diagonal.

[NFLX, in Wikipedia]


For the long leg I shall use the JUN 2016 series of options, which trades for the last time  212 days hence, on June 17, 2016, and for the short leg, the DEC series, which completes trading 30 days from now on Dec. 18.


Implied volatility stands at 00%, which is !0 times the VIX, a measure of volatility of the S&P 500 index. NFLX’s volatility stands in the 00 percentile of its annual range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

NFLX has completed three bull signals in the past year. One was successful, with a yield of 11.0% over 44 days. Two were unsuccessful, with a loss on average of 43.8% over 33 days. The success rate is 33%.

That record suggests a neutral strategy, and the relative low implied volatility compared to its annual range suggests a time spread. For an expensive stock like NFLX, that means a diagonal spread.

Diagonal, long the $120 calls,
sold for a credit and expiring June 18, 2016.
Probability of expiring out-of-the-money


Diagonal, short the $125 calls,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

The premium on the long leg is $18.52, and on the short leg, $4.14. The stock at the time of entry was priced at $119.85.

Decision for My Account

I have opened a position on NFLX as described above.

-- Tim Bovee, Portland, Oregon, Nov. 18, 2015


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


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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.

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