Traders of Netflix Inc. stock options are prepared for a big move on Friday, in reaction to the streaming video giant’s much anticipated earnings report.
Netflix’s stock NFLX, -3.09% has been on a roll this year, as many see the company as a beneficiary of stay-at-home and other lockdown measures put in place to combat the COVID-19 pandemic. Investors get a peek into how much the company has actually benefited when it reports second-quarter results after Thursday’s closing bell.
Analysts surveyed by FactSet are expecting a profit of $1.82 a share, on average, on revenue of $6.09 billion and paid net subscriber additions of 8.22 million.
One way to gauge expectations on how much a stock is expected to move in reaction to earnings is through an options strategy known as a straddle, which involves the simultaneous purchase of one bullish (calls) and bearish (puts) options with strikes around current, or “at-the-money” prices, that expire at the end of the week.
Straddles are pure volatility plays and not directional, as buyers are looking to make money if the stock moves more than expected, in either direction. Options market makers use historical and implied volatilities to price straddles. Betting on them is similar to betting on over-under lines for a score to a game, rather than betting on a winner or loser of the game.
Netflix’s stock fell 1.0% in morning trading Thursday, putting it on track to suffer a fourth-straight loss since closing at a record $548.73 on July 10. It has still soared 60.1% year to date, compared with the S&P 500 index’s SPX, -0.67% 0.8% decline.
As of Thursday morning, Netflix options implied a 12.8% move in either direction on Friday, according to Garrett DeSimone, head quant at OptionMetrics.
That compares with the average one-day post-earnings move of 4.4% over the past eight quarters, and 7.9% over the past 21 quarters, according to a MarketWatch analysis of FactSet data.
“The large premium in options is likely fueled by recent euphoria for the tech sector and momentum, much of which is driven by the retail trade,” DeSimone said.
Netflix’s stock has declined on the day after the past two earnings reports, and after five of the past six reports. Over the past 21 quarters, the stock has declined 12 times by an average of 5.5%, and has gained nine times by an average of 11.1%.
Based on the current price of $518.07, Neftlix’s stock would have to close Friday above about $584.38 or below $451.76 for the buyer of a straddle for Friday expiry to make money.
Otherwise, the house wins.