Tuesday, July 24, 2012

Can't resist speculating on the 200% implied volatility in Netflix

Netflix (nflx) is announcing earnings after the bell today.  Of course, netflix has a very volatile history.  I won't try to summarize that history here as I assume many investors are familiar with their story.

What caught my eye today was the over 200% implied volatility in the weekly options.  That makes options very expensive.  Hence CCI took a speculative flyer on the 60/65 - 85/90 iron condor for a credit  of $2.25.
At the marco level this is a 45/55 wager (win $2.25 or lose $2.75 per contract) that Netflix will end the week between $65 and $85.  A $20 range.

More fine tuned, CCI is hoping that whatever the earnings news is today
  • there will be enough of a tug of war between the netflix bulls and bears to have the stock trade in that range sometime in the next few days
  • the volatility should be sucked out of these options after the news is out today
If/when those events happen, hopefully we will be able to buy back this spread for substantially less than the $2.25for which it was sold.

Yes, this is a speculative trade.  It was done as a very small trade in the portfolio which will not really impact overall results for the year...but ..I could not resist taking a chance on the 200+% volatility of the "rational market".

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