Block Trade – $NFLX Butterfly into Earnings

I think just about every trader focused on stocks or equity options is aware that Netflix (NFLX) reported yesterday after the close.  Also we all know that the stock market seemed to like what they heard. I like to focus on earnings and search around for trades that were implemented just before an earnings release. Before jumping to the trade I came across, I want to discuss a couple of pieces of information that may be useful before trading around an earnings report.

Every week I post the three year earnings history for stocks with an active option market and short dated options available for trading that are reporting the following week. Below are the important numbers for NFLX prior to today’s earnings reaction.

NFLX Earnings Table

On average NFLX shares have moved higher or lower by 16.68% in reaction to the company’s earnings release. The biggest move to the upside was over 42% and the biggest drop was over 25%. Let just say that NFLX moves around earnings and the graph below demonstrates this quite well.

NFLX Earnings Distribution

The smallest move in the last three years for NFLX was a 4.47% more that occurred in reaction to third quarter earnings in 2013.  Also all but three of the price changes involved a price move of more than 10%.

So now on to the trade and I admit this is anything but exciting. However, many traders make a living out of hitting singles instead of homeruns. NFLX managed to make earnings a little confusing by splitting the stock 7 for 1 the day before earnings. Therefore the strike prices for this trade are a little unusual.

Just a couple of minutes before the market closed on Wednesday, with NFLX trading at 98.19, there was a buyer of the NFLX Jul 17th 97.86 Straddle for 9.30 (97.86 Call at 4.82 plus 97.86 Call at 4.48) who then sold the NFLX Jul 17th 92.86 Put at 2.41 and NFLX Jul 18th 102.86 Call at 2.54 for a net cost of 4.35. The payout at Friday’s expiration shows up below.

NFLX PO

The maximum potential loss for this trade is 4.35 if NFLX closes at 97.86 this coming Friday. The maximum gain is 0.65 which is realized with NFLX over 102.86 or under 92.86. To get to 102.86 the stock needed to rise 4.7% or drop 5.4% to hit this maximum profit level, which so far is working out on the upside.