The 4th quarter of 2011 is now viewed as the quarter of "the big growth momentum earnings wreck syndrome". The big names like AAPL, NFLX and GMCR took it on the chin. So did much of the market as I recall, but I digress. At least for the first two names for this earnings cycle that is not the case in the sunny land of 2012 (no problems fixed and the credit you want). I am going to focus on NFLX for now, because I think the reason for the move is much different than AAPL’s, and there is a more interesting trade in there.
First off, note the 22% gap for NFLX. No doubt the call buyers did great, and they will be buying calls on earnings again. An example is the NFLX Feb 125 calls that closed yesterday for $1.56 with a 14 delta. The $17 gap on the opening should have yielded a call value of $3.90 (less decay). The NFLX Feb 125 calls opened $2.85. Where did the $1 go? An “only” $10 move up would have left the call holder with near 0 gains. What gives? Note, the red line in the IV30 chart below. The implied volatility in the options dropped near 50%. When trading out of the money calls (or puts), implied volatility in the options is as important as underlying direction. It is fine to pick direction, just make sure you bet on the drop in volatility as well.
Livevol (r) www.livevol.com
I am thrilled that NFLX regained some subscriber growth. Since I hooked it up to my TV through the Blue Ray player, it is an incredible resource. That being said, the rally feels more like a relief/ short covering than something that is sustainable. Overall, I am a bit ambivalent about the implied volatility at this level, but I would like to fade this rally a bit. If you have a similar inclination, the upside 1 x 2 call spread looks interesting to position a small short delta above the strike. The idea would be to sell a Feb 125 call and buy 2 of the Feb 140 calls for a solid credit. This gives some room if NFLX goes up and will protect in an upside blowout. There is a dead zone in this type of trade (between 126 and 140) as you get closer to expiration, so this is about a 1 week hold max, unless you get the direction moving down as some of the fury subsides. The trade can still be quite right even if the direction is a little wrong.
There is substantial margin in this idea and it is definitely not for beginners as it might require adjustments.
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