Monday, October 17, 2016

NFLX Analysis

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

[NFLX, in Wikipedia]


I shall use the NOV series of options, which trades for the last time 32 days hence, on Nov. 18.


Implied volatility stands at 56%, which is 3.6 times the VIX, a measure of volatility of the S&P 500 index. NFLX’s volatility stands in the 53rd percentile of its annual range. The price used for analysis was $98.67.

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

The Trade

NFLX has been in a sideways zig-zag correction since February. The most recent movement has been to the downside from early October.

The Economic Singularity: Artificial Intelligence and the Death of Capitalism
by Calum Chace

The stock has been rated neutral by Zacks Investment Research and there is no indications that analysts are adjusting their forecasts in anticipation of an earnings surprise.

Absent any indication of a directional trend, I shall construction a direction neutral position.

Iron condor, short the $110 calls and long the $115 calls,
short the $85 puts and long the $80 puts,
sold for a credit and expiring Nov. 19.
Probability of expiring out-of-the-money

The premium is $1.73, which is 35% of the width of the position’s wings. The risk/reward ratio is 1.9:1.

The zone of profit in the proposed trade covers a $35 move either way. The biggest immediate move after each of the past four earnings announcements was $14.06, and the average was $9.08. After eliminating the maximum and minimum post-earnings movements, the central tendency is $11.06.

Decision for My Account

NFLX is a tricky beast, with $5 between strike prices on the grid and a tendency to move directionally for weeks after each earnings announcement.

The grid, with its low granularity, produces results like the one's I'm getting today. Using my model trade sizing of $500 at risk per trade and my goal of at least $200 maximum profit, I get an ideal trade size of 1.53 shares. Since no one an trade fractional shares, my choice is between one share and two.

One share means that my potential profit is only $174 with $326 at risk. Two shares increases the profit to $348, but the risk rises to $662.

It seems as though the pattern of heart-breaking earnings plays on NFLX is too common to justify the higher risk. I'm passing on NFLX. No. trade.

The stock at the time of decision was priced at $99.46.

-- Tim Bovee, Portland, Oregon, Oct. 17, 2016


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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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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