NFLX Analysis

Update 2/17/2016: I exited NFLX for a loss on the third trading day before expiration. Shares declined by 14.15% over 29 days, or a -178% annual rate. The options position produced a 58.5% loss on debit for a -736% annual rate.

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The video entertainment company Netflix Inc. (NFLX), headquartered in Los Gatos, California, publishes earnings on Tuesday after the closing bell.

[NFLX, in Wikipedia]

NFLX

I shall use the FEB series of options, which trades for the last time 31 days hence, on Feb. 20.

Ranges

Implied volatility stands at 80%, which is three times the VIX, a measure of volatility of the S&P 500 index. NFLX’s volatility stands in the 92nd percentile of its most recent range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	132.02	157.02	123.96
Lower	82.04	57.04	88.60
Gain/loss	23.4%	48.7%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

NFLX has been in a possible downtrend since Dec. 7, 2015, The price remains above support and so the chart could well show  small counter-trend correction within the uptrend that began in December 2014.

Brokerages collectively come down with a 4% enthusiasm rating. Of 27 analysts covering NFLX,  44% are giving a strong buy recommendation. There is a strong expectation on the Street of an upside earnings surprise.

Three of the past four earnings announcements have resulted in price increases the next trading session.

Given those facts, I shall build a bullish position, even though it runs contrary to the bearish trend of the general market.

Bull put spread, short the $100 puts and long the $90 puts,
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money

FEB	Strike	OTM
	100	57.8%

The premium is $3.05, which is 30% of the width of the position’s wings. The stock at the time of entry was priced at $106.28.

The risk/reward ratio is 2.3:1.

The strike price is $6.28 above the market price, providing a profit zone narrower than the core tendency in case of a post-earnings movement contrary to my expectations. The biggest immediate move after each of the past four earnings announcements was $17.68, and the average was $12.90. The central tendency, with the maximum and minimum removed, was $10.76.

Decision for My Account

I've opened a position on NFLX as described above.

-- Tim Bovee, Portland, Oregon, Jan. 19, 2016

References

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


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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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.