Netflix Earnings Trade

• Posted by Greg Harmon
• on October 24th, 2011

Netflix reports after the close Monday. It has been a highly volatile stock You may recall I had short play on several weeks ago, that if it stays above 90 this Friday i will be in for free. But for earnings tonight the daily chart shows either a bottoming pattern or a a bear flag. The Relative Strength Index (RSI) is trending higher into the report with the Moving Average Convergence Divergence (MACD) increasing. If it can get over 122 then it will start to look bullish from a price perspective and over 127 will attract buyers.

The weekly chart shows the bear flag and support lower at 100 and resistance higher at 127.50. The RSI is running along the 30 line and the MACD is improving. Slight upside bias. The monthly chart, not shown is printing a long Doji, a possible reversal, with a 6 trading days left in the month.

the options board on the weekly options is just crazy. The Implied Volatility (IV) is is off the charts at over 180% against Historical at 97%. The weekly Straddle prices in a move of 15% by Friday or a range on 98 to 132. But there is a serious upside skew with the 145 calls selling for 1.08 while the 85 puts sell for 55 cents, both $30 out of the money. I am loaded on this name but see a decent trade in a Strangle.

Trade Idea 1: Sell Weekly 145/85 Strangle for 1.64

Selling both the October 145 Call and the October 85 Put. You will need to buy the stock to hedge on a move above 145 and sell the stock short on a move under 85. If you cannot do that then you might consider option 2 which turns it into a Iron Condor.

Trade Idea 2: Sell Weekly 145/150 Call Spread and Sell the Weekly 85/70 Put Spread.

This is Trade Idea 1 but with loss capped at $5 on the upside and $10 on the downside and should net about a 90 cent credit.

For either trade expect a huge IV bleed in the morning. That is the big key here, selling volatility. And both trades offer protection against a 26% move.

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