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Netflix, Inc. (NFLX) Options Traders Bet on Earnings Success

Market pricing in a 15% move in NFLX between now and Friday

by 4/22/2013 1:02 PM
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With Netflix, Inc. (NASDAQ:NFLX) preparing to unveil its latest earnings figures after tonight's close, option players are gambling on a short-term move. At midday, roughly 41,000 calls have crossed the tape -- compared to 31,000 puts -- and both call and put volume are handily exceeding typical levels.

Heading into this report, Schaeffer's Volatility Index (SVI) for NFLX currently stands at 0.80, higher than 76% of the past year's readings. Also, Schaeffer's Volatility Scorecard (SVS) is at a new annual high, indicating that NFLX options are fairly priced, relative to the chance for a large move on the charts. Currently, the at-the-money (175-strike) straddle expiring this Friday is priced at $26.60, or 15.3% of the stock's current price of $173.95. In other words, the options market expects a move of more than 15% (higher or lower) in the shares between now and Friday's closing bell.

This kind of volatility wouldn't be out of the question for Netflix, Inc. shares. Although the company has issued a positive earnings surprise in each of the last eight reporting periods, its price action after the fact hasn't been as predictable. In fact, NFLX has dropped an average of 4.5% during the day following its earnings release. Last time in the earnings confessional, however, was a different story -- the stock gapped up 42.2% the session after its report, and was 62.4% higher just one week later.

Some speculators seem to be hoping for a repeat performance, as the weekly 4/26 190-strike call is currently the most popular option today. More than 3,300 of the out-of-the-money calls have changed hands, versus open interest of just 1,021. The large majority of the calls traded off the ask price, and implied volatility has spiked 40.8 percentage points, suggesting these are being purchased to open for a volume-weighted average price (VWAP) of $6.05.

The specific bet is that NFLX will rally through the breakeven price of $196.05 (strike plus VWAP) by Friday's close, in order to make these profitable for the call buyers. If NFLX is still trading below the strike price when the weekly options expire, the traders lose 100% of the premium paid.

Delta on this option has risen to 0.33 from 0.24 today, as the stock has rallied almost 6% after being upgraded. There is now a roughly 1-in-3 chance priced in that the option -- still out-of-the-money by roughly $16 -- will be in-the-money by expiration.

Analysts are currently targeting per-share profits of 19 cents for the first quarter. This is a notable improvement from the year-ago period, when Netflix, Inc. (NASDAQ:NFLX) announced a loss of eight cents per share.


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