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Tuesday, January 25, 2011

How to play NFLX earnings

I don't know in the past but at least today, front month volatility in the January weekly options has sky rocketed, while February volatility remains comparatively lower. So, I started to play around with Calendars, selling front month options and buying under-priced February options for protection, just to see different profit pictures and there is one that definitely caught my eye and I think it has potential to be the best play overall analyzed in this blog, for several reasons, but mainly the good profitability range, good risk/reward and probability of success.

Selling the January weekly 165 PUT and the 195 CALL while at the same time buying those same options but in February expiration results in the following profit picture:

(Click on Image to enlarge)

Ten contracts are being traded per leg, which means 40 contracts in total:
(Click on Image to enlarge)

There you see, total debit 5.31. For ten contracts per leg that is a total debit maximum risk of $5310, but with potential to make 6000 - 8000 dollars in profit in just the next 3 days. And the most beautiful thing, look at that profitability range! NFLX can literally oscillate from 152.17 to 214.56 in the next 3 days and this play is still a winner! As of this writing NFLX is trading at 186.50.

The ThinkOrSwim analyzer says there is a 99.43% probability on this trade. lol, I don't want to be so optimistic but certainly I agree with it in that the odds are really in my favor, that's why I love this position.

All right folks, I will keep you posted on the outcome of this baby in the next hours.

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