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The No-Play in Netflix

$NFLX reported earnings last night. They sure did take a drubbing, currently down over 40 points in the premarket session.

This was a potential name we considered at IWO Premium for a potential Earnings Trade. However, upon further inspection, we knew it was a no-play for this report.

Consider a longer term chart of the name:

A quick look at where the stock was and how it traded over the past 4 quarters was a clear sign to stay away from trading options before earnings.

Think about this: the options market tries to price risk based of previous price action as well as expected future results. Since the last earnings report, the stock has completely changed from a fundamental, sentimental, and technical basis. Therefore the accuracy of the option pricing could be completely off base, and that's what happened this time around.

Is there a trade here? Absolutely. The options market was pricing about a 15% move in either direction going into earnings. The stock has currently moved twice that amount.

When we see a stock make a 2x move relative to expectations, it sets up the stage for option shorts being forced to cover, along with many stuck longs. You can take advantage of that buy purchasing November vol late in the morning. Something like the 75/80 strangle should offer nice returns, assuming volatility is here to stay.

Want to learn more about this? I'll be doing a public webinar over at SMB with a primer about Trading Earnings as well as current examples. Sign up here.

by Steven Place

Steven Place is the founder and head trader at