Previously, we had thought our projection of a slide to 87% for implied volatility for options expiring Friday might be too aggressive. As it turns out, that slump in concern was way too conservative.
The popping sound of options implied volatility coming out of the stock is far louder and has captured investors’ attention in the first 30-minutes of trading in options on Netflix. Thirty-day implied volatility on the stock has fallen by one-third to 39.5%, while for nearby options, implied volatility slid to ~55% from around 120% following the release of earnings after hours on Monday.
Options volume of around 40,000 is significantly concentrated in the nearby expiration this Friday. Around two-thirds of that volume has been seen in calls (16k) and puts (13k) maturing in four days’ time at strikes ranging from 325.0 to 500.0. To give you a sense of the defensive nature taken by dealers ahead of earnings, call option premiums at the closest four in-the-money strikes are trading at lower prices on the day--unusual given the 6.6% jump in the price of shares in Neflix.
Chart shows slide in 30-day implied volatility on Netflix post-earnings.
From earlier today: Netflix leaps in pre-market trading
An analyst price target has already been lifted on shares of Netflix (Ticker: NFLX) to $520 from $510 at Pacific Crest following earnings in which the online video service revealed greater growth in its subscriber base for the first quarter. Cantor Fitzgerald has shifted from “hold” to “buy’ while Raymond James used the content of the earnings release to tag the stock’s predicted outlook with “outperform” rather than “market perform”. Shares closed around $348 before the release with options implying an approximate $42 move either up or down as a result of earnings.
In pre-market trading we have captured the changing sentiment amongst investors along with our projection of lower implied volatility surrounding the stock when trading resumes. Typically, option markets tend to calm especially when the share price heads higher rather than lower when uncertainty is reduced in the form of better-than-expected earnings. In the following chart we are showing the Probability Distribution implied by options expiring on Friday. Implied volatility was sky-high at this expiration – 122% compared to around 60% on 30-day options. The blue curve represents the pre-earnings prediction as shares settled on Monday, while the red curve displays the likely trajectory at pre-market of share prices coupled with a slide in implied volatility. Of course, volatility at Friday’s expiration might move by more or less than we are showing in the chart. The updated bell curve is taller than the pre-earnings distribution on account of the assumed reduction in options implied volatility as, by definition, certainty increases.