Netflix Inc. (NFLX)

Update 3/18/2022: I exited my short iron condor options spread on NFLX when it expired, for no debit per contract/share, a profit before fees of $405 per contract.

However, at expiry the in-the-money options — a vertical spread within the iron condor — were converted to shares, both long and short. My brokerage for options trading, TastyWorks (best in the business for active traders in my opinion), bought the short shares and sold the long shares for a net loss, as is normal when options expire. The loss was the maximum possible for a $10 spread between strike prices.

At the March 18 close, shares were trading at $380.60, down $136.90 from the entry level.

The Implied Volatility Rank at exit was 49.4%, down 37.1 points from the entry level.

As always when options are assigned, exercised or expire, there are three sets of results: For the options, for the shares, and a combination of the two.

The shares transactions followed the strike prices; shares were bought for $450 a share, and sold for $440 a share, for a $10 loss per shares before fees. Since an options contract is for 100 shares, the loss on the position created by expiration was $1,000.

However, when I entered the options position, I received a $4.05 premium for each contract/share, or $405 per contract. So when the options and the shares are combined, my credit was $444.50 and my debit was $450, for a $595 loss total on the 100 shares.

The earnings play fell into trouble immediately after the company announced its results. As I noted upon entry, options pricing implied a $34.36 move either way, and I chose to use an iron condor position to profit from a move in either direction within that range, and actually, I padded it, for a profit zone running from $483.14 to $561.86. When trading resumed after earnings were published, NFLX opened at $400.43, and hasn’t returned to the position’s profit zone since that time. The potential loss occasionally moved to less than the maximum potential loss from time to time, but I could never get a fill, and in the end holding the position until expiration proved to be the best way to minimize the loss.

Shares declined by 26.5% over 57 days for a -169% annual rate.

The options position produced a 100% return for a +640% annual rate.

The shares position produced a 2.2% loss for a -811% annual rate

The combined options and shares positions produced a -1.3% loss for a -8% annual rate.

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I have entered a short iron condor spread on NFLX, using options that trade for the last time 57 days hence, on March 18. The premium is a $4.05 credit per contract share and the stock at the time of entry was priced at $517.50.

The Implied Volatility Ratio stands at 86.5%

Premium:	$4.05	Expire OTM
NFLX-iron condor	Strike	Odds	Delta
Calls
Long	575.00	78.0%	27
Break-even	569.05	76.0%	29
Short	565.00	74.0%	31
Puts
Short	450.00	78.0%	18
Break-even	444.05	79.5%	16.5
Long	440.00	81.0%	15

The premium is 40.5% of the width of the positions short/long spreads. The profit zone covers a 10% move to the upside and a 16.5% move to downside. I skewed the position in order to give greater protection to a downside move.

The risk/reward ratio is 1.5:1, with maximum risk of $595 and maximum reward of $405 per contract.

How I chose the trade. The trade was placed to coincide with NFLX’s earnings announcement, after the closing bell on the day of entry. The short strikes were set beyond the expected move of $34.36 either way, based on options pricing, which would give a price range of $483.14 to $561.86. NFLX has a history of breaking beyond expectations, and I’ve been burnt before by that tendency. So the position, as designed, is profitable between $450 and $565, providing more cushion for an overly large post-announcement move. And as a I said above, it’s skewed to the downside.

By Tim Bovee, Portland, Oregon, January 20, 2022

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.