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Options and Earnings

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April 27, 2011 – Comments (0) | RELATED TICKERS: NFLX

Before we start, this play is high probability, high risk, and very short term..

This will be a play with options where we sell premium before earnings are reported to take advantage of the inflated prices.  Lets look at the options on April 25th at the market close, this is an hour or so before earnings are reported but since option prices are not affected in after hours it allows us to view the prices.

 

Here are the Straddle prices at the close for the weekly expiration at April 29th.  A straddle is a purchase of a put and call with the same strike and maturity with the hopes of capturing a large move in either direction.  Netflix was trading at 251.xx so the ATM straddle is the 250 strike with an implied volatility around 107.44% (huge volatility).  We use the ATM straddle to see what the market has priced for a move.  Here we see a 24.85 move in either an up or down direction, so that puts upper and lower limits at 274.85 to 225.15, respectively.  That is approximately a 10% move in either direction. 

Okay so now we know what the market is expecting, how do we trade it?

Lets look at the single options on April 25th.

 

Here is a look at the puts from 225 - 200.  The market believes that the move could reach down to 225 so we will ignore those at this point.  We will be looking for a safer route so we can collect easy premiums.  To be safe we would venture down to the 205s which we could sell for .445 (mid-price).  Picking the 205s gives us approximately 45 points of cushion or 18% wiggle room.

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