Wednesday, September 21, 2011

Netflix (NFLX) - Is NFLX Going Away?... Or is it the 800-pound Gorilla? Option Market Reflects... Both?

NFLX is trading $127.33, down 2.1% with IV30™ down 3.1%. The LIVEVOL® Pro Summary is below.


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Netflix, Inc. (Netflix) is an Internet subscription service streaming television shows and movies... duh, Netflix!

Let's get right into it. The news is simple with regard to the stock, it's down a lot. The Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

The company peaked at $304.79 on 7-13-2011. As of this writing, it's down 58% in two months. Perhaps more dramatically, since closing at $208.71 on 9-14-2011 (a week ago), the stock is down ~40%. In those same two time periods IV30™ is up 74% and 61% respectively. More to the point, check out the IV30™ levels on these dates:

7-13-2011: 49.32
9-14-2011: 53.22
9-21-2011: 85.59 (today)

So what?... The stock drop from 7-13 to 9-14 of 31% was met with relative calm in terms of vol (up 8%). While the valuation of the company dropped, the risk (vol) associated with that valuation (stock price) did not increase very much. But, over the last week, the valuation has dropped 39% and the vol has exploded 61%...

Ok, ok. In English, while the news seems to finally be out, nothing is settled about the future of this company -- even the near term future (and yes, for those of you that read the Journal, I did just quote myself... sup?).

Let's turn to the Skew Tab to examine line-by-line and month-to-month vols.

For those of you new to NFLX skew, that parabolic shape in the front months is actually normal. The striking thing here, really, is that the skew looks normal (for NFLX). There isn't a bias to one side or the other, vol is just massively higher. That vol increase has made some of the downside puts almost... unbelievable...

Let's turn to the Options Tab, below.

I actually didn't include it in this snapshot, but the Jan'12 35 puts are priced at $0.65 x $0.68 with stock now printing $126.00. That's ~124 vol. Whoa...

All in all, the future of NFLX is in question, the valuation of this now "two part" company is in question, and the possibilities of much lower or much higher are both reflected in the options market. However, the downside is still priced to more risk as we move further out.

While there is a parabolic skew shape in the front, don't confuse that with the longer-term trend. Using $126 as the center, the 65 strike puts in Jan'12 are priced to 124 vol while the 190 strike calls are priced to 72 vol.

I hate to say this about a company whose customer service has been absolutely stellar, but... Is NFLX the next AOL? A trail blazer that didn't quite get it right and will be run over by newer technologies... Or is it the 800-pound gorilla that will prevail?...

Possible Trades to Analyze
As with all panics (founded or otherwise), the question is, what happens when calmer heads prevail? NFLX vol will eventually drop, but the stock might be $100 or more away from the current price when it does, making essentially any delta neutch vol sale a loser.

Near term sales (like the weeklies) are pure gamma plays -- but, the juice is rich so that's not necessarily a bad move, it's just a risky one. The ATM (125 strike) weekly straddle is worth ~$10 with $2.33 in parity. Considering the stock has moved $80 in seven calendar days, and just as of this writing (since the snapshots) has moved more than $4 on the day, maybe that's cheap?... Then again, 107 vol... doesn't sound cheap.

One position that seems interesting is owning that 125 straddle in the weeklies. For the bold, selling on a bigger ratio some wings with more than $10 difference in strikes might be... bold...

Longer term, man that vega feels rich, but really, is NFLX gonna settle as a $125 stock?  Would you bet for or against that?

This is trade analysis, not a recommendation.

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