Netflix closed yesterday (January 22nd) at $333.73. They released earnings last night after the market closed. Today the stock closed at $388.72 which was up $54.99. A lot of traders will look at this movement and wonder why they didn’t enter into a trade before the announcement. The problem is we didn’t know that NFLX was going to jump like it did. The earnings report in October had NFLX dropping about $33 after being up about $35 at one time. The earnings in July ended up with a drop of about $12.
Hindsight is always easy. Would you have been confident that NFLX was going to act the way it did? Looking today at the call options for January week 4 (expiring tomorrow), there were numerous gains from $1000 – $5000 per contract. But the put options saw mirror opposite losses. If one was looking at taking a chance yesterday, the cost for the 1st strike out of the money (call or put) was about $1600 per contract. Great if you guessed right, not so if you guessed wrong.
If you took the average move after earnings for NFLX in the last year, it was about $32. There was about a $43 gain last January and about a $40 gain in April to go along with the two most recent losses. If you bet that NFLX would move about $32 today and bought the closest strike price, you would have been looking at the $365 call or the $300 put. Yesterday, those were trading about $420 per contract. If you guessed bullish, you would have had a nice reward of about $1900 per contract. If you were bearish, you would have lost about $430.
During earnings season, there are a lot of big moves, but knowing which way the stock is moving is a flip of the coin. It is a gamble. You also are paying a higher premium on options due to implied volatility. Keep that in mind the next time you think, “I should have made that trade.”
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