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Saturday, January 29, 2011

AMZN, NFLX: big movers on earnings

My most recent trades (AMZN & NFLX) turned out to be a mess. I am just a newbie....out here trying to learn everything I can while paying nothing to nobody ever! It is a good goal, but also a tough one, but I am entirely sure that all the sea of knowledge you need is out there somewhere on the internet, by little pieces here and there, and with good work, you can become knowledgeable without paying thousands for courses and information that with a little effort can be found for free.

Both AMZN and NFLX are proven big movers after earnings. I actually noticed that during the Straddle earnings play in GOOG in October last year. And they are not just big movers, but among the best and biggest ones. Really what seems to make sense is to play these two beasts with at the money Straddles, with front month expiration options, and sell them the next day. And I knew that but I saw that volatility in both cases was high and consequently the options and Straddles just too expensive to yield any profit. That's why instead of buying the Straddles I went with wide Double Calendars betting on a volatility crash in the front month options after earnings, similar to what I did with AAPL a few days before. Now,...AAPL is not a big mover beast, that strategy actualy worked pretty good back then but not with these new guys.

NFLX First

Remember the initial position. The first mistake I made was to think that the profitability range was from 152.17 to 214.56. Big mistake! I noticed that when playing calendars this range changes constantly, something by the way that doesn't happen with Iron Condors. So the day after earnings when I looked at my profit picture the upper break even point had gone down from 214.56 to somewhere in the neighborhood of 206 - 207. I was totally correct predicting that NFLX wouldn't get past 214.56, in fact NFLX spent all day ranging from 207 to 210 but never beyond 211, let alone the 214.56 I had initially played.

The problem was, profit picture, and my profitability range had changed drastically, and although NFLX was below 214.56, for some reason I was facing like a 1000 dollar loss in the morning. The reason is simple,.....volatility. You expect that the options you are long (February options in this case) don't lose premium, but they actually will, because there is also a certain decay in volatility for them as well. This lesson of course makes me aware of the need to study the Double Calendars a little bit more to fully understand them.

Anyways the final numbers:

Today is Saturday and for some reason, ThinkorSwim doesn't allow me to change the period of consult in the "Account Statement" tab in the "Monitor" section. So I am basically going to the totals and my thinking during the close of this trade.

NFLX was clearly going up with strength, so I decided to sell all the options except for the 195 February CALL, expecting to gain a little more with it and mitigate the losses as much as possible.

I closed the Calendar made up of Puts for 0.55 ($550 of credit). Initially I had invested 2.21 on them ($2210 debit). So the Put calendars represented a $1660 loss (1.60 points in 10 contracts per leg).

Then I closed the JAN4 11 195 CALL that I was short. It was closed for a 14.80 debit ($14800). Since the initial credit received for them was 4.60 ($4600), these options alone represented a loss of $10200 (10.2 points for 10 contracts).

Finally the FEB 2011 195 CALLS that I was long, I could sell them for 19.01 ($19010). Since these CALLS had been bought at 7.70 ($7700), they represented a profit of $11310.

Total losses: 1660 + 10200 = $11860
Total profit: $11310
Final balance in the position: loss of $550

$550 of loss in an initial $5310 investment, represents a 10.36% loss. So, in spite of everything I was able to mitigate this catastrophe to a good extent. And left with a lesson about the profitability range in Double Calendars.

AMZN Later

The Double Calendar open on AMZN was still there,.....AMZN's earnings were due one day after those of NFLX, so either I held on to my position, or closed it before a similar catastrophe happened. I decided to go with my survival instincts and close the Double Calendar in the morning, a few hours before earnings report.

A debit of 3.97 had been invested, which at 10 contracts per leg means $3970. I was able to sell the position for 4.19 points per contract or $4190. So, AMZN gave me a small 5.5% return on investment in one day.

What would have happened if ....?

The correct play was in both cases a bet on a huge movement, either with a Straddle or a Strangle. Let me analyze what would have happened had I chosen that strategy.

NFLX closed at 183.03 on January 26. Since there are no options at that strike price, It would have been good to buy the 180 PUT and the 185 CALL (January weeklies), thus creating a Strangle position

BUY NFLX Strangle(180, 185) on January 26 for 15.98 ($1598)

One day later NFLX explodes by over 25 points
SELL NFLX Strangle on January 27 for 30.88 ($3088)

For a profit of $1490 representing a spectacular 93% return on investment in one day.

AMZN closed at 184.45 on January 27. Since this number is fairly close to the 185 strike price it would have been good to buy the 185 PUT and the 185 CALL (January weeklies), thus creating a Straddle position

BUY AMZN Straddle(180, 180) on January 27 for 9.38 ($938). This position could have been sold the next day during morning hours for a profit of over $800.

Lesson learned: AMZN and NFLX are consistently among the best movers on earnings and they should be treated that way,.....until things change.

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  1. Wow amazing information you have shared out and good to know about the AMZN and NFLX...

  2. Thanks. There you got it, piece of knowledge less to pay for :)

  3. yeah, now the only problem is how to predict the actual after earnings move...could be anything...for the last earnings ( July 2012) the AMZN long straddles would have been a disaster...I'd say-always go short calendars ( short front/long back month) but use farther OTM strikes and proper risk management ( like set your maxloss at 2% or less of your acct value)

  4. Great information.
    I was thinking if double diagonals could be used instead of double calendars, since they have farther OTM long options which have lower vega and less affected by the vol crush.

  5. Amazon and Netflix has turned out to be a mess, Investors think before you investing in these stocks. Perfect time to make a good decision and choosing the right path to invest.

    1. Absolutely. This comment surprised me quite a bit as I wrote this article a few years ago. I can say I do not trade earnings at this point. So, I'm kind of away from all its madness.
      Thx for dropping by and leaving your opinion.