Here’s how that trade on Netflix ($NFLX) actually worked out. (July 17, 2020)
NFLX
I want to come back to Netflix ( NASDAQ: NFLX ). If you saw yesterday’s video you know that I was looking at the after hours move when the company reported earnings that weren’t that great and the stock traded down quite a bit. And I said that based on the option chain that has now expired, the July 17th options, the at the money call and put, you combine those two together, they gave us an implied move of about $44.00.
The stock was way down after hours and I said if the stock falls below this level, and it was right here, 183.39, if it falls below that level then it is likely going to be reverting to the mean, it’s going to be reverting inside. Because the implied move in options isn’t how far is the stock going to go tomorrow; it is how far would the stock go from where it is right now to where it could be at options expiration?
The market was implying a move to about 484.00 and at one point after hours the stock was trading all the way down to 450.00. That was, if you are sitting there watching, that was a really good buying opportunity if you are paying attention to the options implied move number; because you say wait a minute, the options market is implying that the stock can fall $44.00, here’s the stock at $450.00, it’s fallen $74.00. Okay, I’m going to buy that stock because how much further can it go down based on what the option market is pricing in?
The options market is actually pretty smart in the aggregate. Individual option traders may not be but the option market as a whole is really pretty smart and it’s pretty accurate. But here was the problem today; the stock actually opened up at 495.00. Well, that was within the range. That was within the range that the stock would move and so there was no edge.
You didn’t have an edge to where you say, “Oh, a big gap down, I am going to buy it because of the implied move.” In fact, if anything because the stock opened where it opened within the implied move range you would say, “I have no edge so now I just have to kind of watch the intraday action and see how the stock trades.” In fact, if you look at the actual low, 484.00 was the low today, so the stock actually just came down and touched that lower level of what the implied move would be and then just stayed within the range.
And so generally speaking, what am I saying? I am saying this was just kind of a dud day. It just fell lower and then traded sideways. So the moral of the story here is, you can be looking at the best trade in the world as a possibility but if it doesn’t happen don’t pretend that it is. Or say I’ll buy it for some other reason; maybe it’s going to go up more.
You want to be trying to trade as much as possible, certainty. Kind of like sure things, that’s what you really want to be doing, trading that area of certainty where a stock makes a big outsize move and is highly likely to snap back. Yesterday it was that setup; last night after hours when I was doing this video that was the setup. But today, because of where the stock opened up, let’s just put it this way, the options market was absolutely correct. And the correctness of that options market negated any trade that we had because the stock essentially agreed with the option market. We kind of want to trade the disagreements, not the agreements.
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