Playing the Expiry: January 27, 2012
If you had the guts to buy or sell Netflix [NFLX:NSD] options prior to their earnings last night, then I applaud you for your risk-taking, hopefully it went well. But now that their earnings have passed, option traders are still pricing in a heavy swing for one day!
The shares should remain at the current $117 level for quite some time, now that traders have found a nice "flat" range to settle on. The $120 level acted as previous support and is now current resistance. Earlier in the day, the weekly 120 call options were selling for as high as $2.34, but have come down to $0.65. The puts at 110 still have some value left as well, a surprising $0.30. If you've read PTE before, you know where I'm going.
Total premium on a short strangle at 120 and 110 would net you $0.95 right now. Each pair of legs will require just north of $3,000 margin (may vary with broker). You profit if the shares close on Friday between $120.95 and $109.05. That gives you a $11.90 range. Based on the current price of about $117, that provides downside protection of 7.29 per cent and upside protection of 3.37 per cent. Considering that the shares are now starting to downtrend on the day, the closer out-of-the-money calls may be worth the risk.
The total return on this trade is approximately 3 per cent for one day and two hours. Prepare yourself though, as the shares still possesses volatility, but as many traders will know, shares are often less volatile the day after earnings because all uncertain news has been removed.
If you want to go for broke, or think the shares will stabilize for one day at around $117, then you could also consider writing the 115 put for January 27. With a current bid of $1.22, you would return over $187 per pair, or over 5.6 per cent return. Personally, I would stay away from the 115 puts only because I think we will see some profit-taking tomorrow.
Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. Reminder that all Playing the Expiry posts are considered and executed transactions for my account and should not be taken as professional advice.
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