Here’s how Netflix (NFLX) turned out today after a gap and crap earnings move. And here are some methods that you can use to make similar trades over the next few weeks. (October 17, 2018)
Netflix ( NASDAQ: NFLX ) gave us a really, really good earnings trade today. In this kind of choppy market these are the types of trades that you are going to make money on. We are just not seeing these trends like we see here; you are just not seeing these trends. The market is just choppy; it’s all over the place.
So if you want to be trading in this environment you have to have to have the right kind of trade. It is kind of like Stanley Tool Works or whatever, the right tool for the right job, something like that. In this kind of market you need to be trading in the right way, in the way that suits the market not the way it suits you. By the way, if you can’t trade in the way that suits the market that’s okay, then just don’t trade in this market; it’s really okay. The best traders don’t trade all the time. The best traders trade when they can make money.
Let me show you how to make some money on these kinds of moves. Yesterday I posted a note that said that the implied move on Netflix ( NASDAQ: NFLX ), according to the options contract, was about 10 percent. And the way you do that, by the way, is you take the closest contract, in time, the closest one to expiration, which would be Friday, and the closest strike price to whatever the stock is. You can get really, really super specific and I see these dudes doing it on TV but it is all BS. The option market doesn’t trade that specific.
What you do is, you take the closest option price here right at the end of the day, the stock closed at 346.40. So you would take the 345.00 call, and 345.00 put. The put would be slightly out of the money. The call would be slightly in the money. They kind of offset each other but most of the premium, most of the price of those options is time and implied volatility. So you add those two up and then divide them by the price of the stock. In that case the close was 346.40, you divide it by the price of the stock and that is the percentage move that the option market is pricing in. It was about 10 percent, give or take. And so with a 346.00 price that’s a move of $34.00-$35.00, something like that.
So where did the stock actually open up? The stock opened up (if you look at the box on the left), it opened up about $32.00 above yesterday’s price. So it opened up within this range of implied volatility, the implied move, somewhere up there, down here, I don’t know, 300.00ish, something like that. So the stock really stayed within the range that was implied by the option market.
Here’s what you need to be doing: When you think about this (this doesn’t show the after-hours trading in days gone by), the stock was, at one point, trading well above 380.00. I think it was up, I could be wrong about this, but I think at one point it was up at 400.00 or 405.00. Again, I could be wrong about that and it doesn’t matter. But what I am saying is, that the stock was actually down, it was trading down into the open.
We had some members at Option Market that had an Iron Condor trade on; where they had sold the out of the money calls, out of the money puts and they were getting a little bit nervous because the stock was above their call strike price. I said, “Wait, just wait. Let the market open up. Let things settle out.” And sure enough, this opened up and then it just traded lower. You can say, “Well, I think the option market is fixed.” No, it’s not fixed; it’s too thick for that. Options trade too efficiently in these really liquid contracts. What this really did was kind of tell you where traders are positioned and then in the process of unwinding those positions, that’s going to push the stock around in certain directions.
The reason I am going into details on this is to show you, you can use options to give you an idea of how to trade a stock as far as whether to short it or whether to be long. The thing that I want you to think about too, and nobody really talks too much about this; let’s say you are long the stock from 325.00. Let’s say you have been holding the stock for a while. You bought it at 240.00 and you are wondering whether you are going to hold the stock through earnings or not. You look at the options market and you say, “Hmm, it’s implying a $35.00 move one way or another. So am I going to hold my position if it falls $35.00, which would be to around 320.00?. If it falls to 320.00, which is the lowest part of the move, am I going to be okay with that because I bought it somewhere down here? Am I going to be okay with that or am I not?” If the answer is okay, then sure you hold your position. If the answer is no, I don’t want to give up that kind of money then you close your position.
What you are doing is you are risking this 10 percent pullback in order to have a chance of making a 10 percent move to the upside. So you can use the implied moves on these options in order to assess your specific and particular risk in holding a stock over earnings or not. If you have a 12 percent profit in a stock and the options market is implying a 10 percent move, then according to the options market, even if the worst case scenario happens, you are still up a little bit, you’re up 2 percent. If that’s okay with you then you hold. If you are up only 5 percent and the options market is implying a 10 percent move, well maybe you don’t want to hold because you don’t have enough of a profit to absorb any loss that the post-earnings report move will give you. So focus on these types of things and I promise you, you will be able to stay on the right side of the move as long as your discipline is working in your favor.
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