Netflix (NFLX) is due to report earnings on Thursday after the closing bell.
The Barchart Technical Opinion rating is an 80% Buy with a weakening short term outlook on maintaining the current direction.
Netflix rates as a Strong Buy according to 23 analysts with 2 Moderate Buy, 13 Hold ratings and 2 Strong Sell ratings. Implied volatility is 43.46% which gives NFLX and IV Percentile of 79% and an IV Rank of 81.63%
Today, we will analyze three different ideas:
- A Short Iron Condor
- A Bull Put Spread
- A Butterfly Spread
Short Iron Condor
The first strategy is a short iron condor. An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Using the October 18 expiration, traders could sell the $645-strike put and buy the $640-strike put. Then on the calls, sell the $785 call and buy the $790 call.
Yesterday, that condor was trading around $1.55 which means the trader would receive $155 into their account. The maximum risk is $345 for a total profit potential of 45%.
The profit zone ranges between $643.45 and $786.55. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Let’s take a look at another potential option strategy.
Bull Put Spread
Traders thinking that NFLX might trade with a bullish bias could just trade the bull put spread side of the iron condor.
Trading just the bull put spread side would involve selling the October 18 $645 put and buying the $640 put. This spread could be sold yesterday today for around $0.90 or $90 in total premium.
The maximum gain is $90 with total risk of $410 for a potential return of 21.95% with a breakeven price of $644.10.
The final idea we will look at is a butterfly spread.
Butterfly Spread
A butterfly spread is constructed by buying an in-the-money call, selling two at-the-money calls and buying an out-of-the-money call. The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.
The maximum profit is calculated as the difference between the short and long calls less the premium that you paid for the spread.
Using the October 18 expiry, traders could buy the $670 strike call, sell two of the $705 strike calls and buy one of the $740 strike calls. The cost for the trade would be $590 which is the most the trade could lose. The maximum potential gain is $2,900. The lower breakeven price is $676.10 and the upper breakeven price is $733.90.
Conclusion And Risk Management
There you have three different trade ideas for Netflix’s earnings. All three are risk defined trades, so you always know the worst-case scenario even if NFLX makes a bigger than expected move.
Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital.
Short-term trades also have assignment risk, so traders need to be aware of that possibility.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
