Netflix Expected Move
Here is the usual thread of the earnings season:
Understanding Past moves (Realized Volatility) vs Future Moves expected (Implied Volatility).
Let’s take NFLX Netflix as an example.
Netflix will release its earnings after the close.
Now for the expectations:
Let’s look at how the stock has been moving during recent earnings:
That translates into an average move of +/- 8.6% over the last 9 earnings:
Now let’s compare this historical moves to what the option market is pricing for this release.
To do so, we will be using an ATM Straddle.
That is an At The Money Call + an At the Money Put.
We need to look at the Netflix Options Chain with the options maturing just after the earnings.
For this NFLX example as the earnings are after the close, we can be using the weekly options that will expire this Friday the 18th of October.
Let’s take NFLX last: 702
I can do the following:
702.5 ATM Straddle = 702.5 C +702.5 P
If I take the Options Chain, I have:
With:
702.5 Call = 27.29
702.5 Put = 27.41
Which gives me:
ATM Straddle = 27.29 + 27.41 = 54.7
Or the market is expecting Netflix to be moving by $54.7.
Let’s now compare $54.7 to NFLX last:
54.7 /702 = 7.8%
Meaning that at yesterday’s close (Wednesday), the options market was pricing a +/- 7.8% move for the NFLX shares on Friday.
How is it versus our recent historical moves at 8.6% for the last 9 earnings?
A bit lower but not that different.
Conclusion: Do not think that options are just pricing moves out of the blue? They look at historical moves to price future moves.
That is the charted expected move:
Any views on that expected move?
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