Netflix stock earnings on tap. Here’s how to set a strike for options trading
Netflix (NFLX) is scheduled to report earnings after the market closes on Tuesday, and the options market could move 8% in any direction while keeping prices open.
Let’s explore how we can set up an option business that fits that perspective
- We think NFLX stock will remain in the expected range.
- The reaction to the earnings report is likely to be positive.
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Using the expected range to select strikes
Taking the January 24 expiration call gives us a good idea of what the options market expects from earnings. We add those up to a total of nearly 71 premiums. With Netflix trading at 871 today, that means it has an expected range of over 8% by the end of the week.
Now that we know the expected range, let’s find a bullseye distribution with a price that breaks around the lower end of the expected range.
On January 24th, we start to create a bull plus spread by selling 800 puts and buying 795 puts.
This spread is trading around 95 cents today. That means a trader selling this spread will receive $95 in option premium and have a maximum risk of $405.
This represents a 23.5% return on risk between now and the end of the week if NFLX stock continues above 800.
If Netflix stock closes below 795 on the expiration date, the trade will lose the full $405.
Netflix’s earnings leave little room for adjustment.
The bullish highlight spread point is 799.05, which is calculated to be 800 short of the 95 cent option premium per contract.
With short-term trades like this, there is little room for adjustment over earnings. Once the earnings report is out, there isn’t much time before it’s over, so the move is pretty much done.
A 23.5% return in a few days would be nice, but the possibility of losing 100% is very real.
As such, this trading style is only for traders who have a high risk tolerance and are optimistic about Netflix stock.
Follow up on past income trading
As of 2011 IBD Stock CheckNetflix ranks 1st in the industry group. It has a composite rating of 98, an EPS rating of 98 and a relative strength rating of 91.
As a follow-up, last week’s income bull had a wide trade JPMorgan Chase (JPM) has no expired value. That was the best case scenario for credit expansion, meaning it made a full profit.
It is important to remember that options are risky and investors can lose 100% of their investment.
This article is for educational purposes only and not for business advice. Always remember to do your own due diligence and consult your financial advisor before making any investment decision.
Gavin McMaster has a Masters in Applied Finance and Investments. He focuses on income trading using options, is very conservative in his style and believes that patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter. @OptiontradinIQ
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