Will Netflix, Inc. (NFLX) Sell Off on Earnings?

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Netflix, Inc. (NFLX) is a California based entertainment content provider that operates subscription-based services for both online digital streaming internationally and physical DVD delivery to customers within the United States. As of the time of this post (12:50PM CST), NFLX is currently trading at 343.10, up 1.71% on the day. The stock is currently well within the lower portion of its 52 week trading range of 299.50-489.29 where it has remained after share prices made a significant gap lower following last quarter’s earnings release. NFLX is set to report earnings today, 1/20/2015 after the market close.

Over the last eight quarters of earnings data available, NFLX has traded with mixed results, moving higher and lower equally, four out of eight sessions immediately following the EPS release. NFLX has been an extremely volatile mover over this same time period, with an average historical move of approximately 16.0%. Currently the options market is pricing in a slightly lower than average move of approximately 11.78% based on the price of the at the money straddle. This would represent about a 40.50 move in the price of the underlying stock by this Friday’s weekly options expiration. On a technical basis, NFLX remains well under the downward sloping Ichimoku Cloud and relevant moving averages on the daily chart. From a fundamental standpoint, Netflix faces continued competitive pressure from rival digital content providers such as Amazon’s Prime service, and Netflix’s membership growth will be closely scrutinized after disappointing numbers in this area last quarter preceded the precipitous drop in share prices. With a confluence of bearish factors in place for NFLX, I will be looking to establish a short position this name going into this afternoon’s earnings release.
Potential Trade: Buying the NFLX Jan 23rd Weekly 315-310 Put Spreads for $1.40
Risk: $140 per 1 lot
Reward: $360 per 1 lot
Breakeven: $313.60

Andrew Keene

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