Monday, December 20, 2010

NetFlix (NFLX) - Time to Buy Vol?

NFLX is trading $178.31, down 0.9% with IV30™ down 5.9%. The LIVEVOL™ Pro Summary is below.

I found NFLX stock using a real-time custom scan. This one hunts for low vols.

Custom Scan Details
Stock Price >= $7
IV30™ - HV20™ <= -8 >= -40
HV180™ - IV30™ >=7
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >= 32

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.

The goal with this scan is to identify short-term implied vol (IV30™) that is depressed both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not purchasing depressed IV30™ relative to HV20™ simply because of a large earnings move.

The NFLX Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can see:
IV30™: 45.32
HV20™: 53.48
HV180™: 57.45

So, IV30™ is depressed relative to the short term and long term realized movement of the stock. Looking to the Skew Tab (below) we can see an interesting phenomenon.

Look how the ATM Dec (Weeklies) have lower vol than the Jan monthlies. This is a little unusual, but it reflects the fact that this is basically as dead a time as there is in the financial markets. The OTM options are priced at significantly higher vol than Jan though (as expected).

Finally, let's look to the Options Tab (below).

Possible Trades to Analyze
1. Ignore Dec, Buy the depressed IV30™:
Buy the Jan 180 straddle for $19.10 (~45 vol).

2. Do #1, but get on the "this week is boring" bandwagon and sell the Dec 180 straddle @ $5.70 (~42 vol).

3. Skip Jan, skip the "conventional" thinking:
Buy the Dec (Weekly) 180 call for $2.10 and look for a move up on Tu, W or Th.

4. Do #1, but sell some elevated Dec (Weekly) skew rather than the depressed ATM vol.:
Buy the Jan 180 straddle for $19.10 (~45 vol).
Sell the Dec (Weekly) 170/185 strangle @ $1.30 (~46 vol).

5. Do #4, but just sell the puts (~52 vol).

This is trade analysis, not a recommendation.

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