Netflix: Volatility King
With 3Q earnings reporting underway this seems this like a good time to update and expand upon Digest Issue 39 "Volatility Kings 3Q 2017 [Charts]" with another look at Netflix (NFLX) scheduled to report after the close today. First a brief market review.
S&P 500 Index (SPX) 2553.17 advanced 3.84 points or +.15% for the week after making a new closing high Wednesday at 2555.24 and new intraday highs every day except last Monday. While it appears overbought and overdue for a cyclical pull back most indicators remain bullish. In the event of a pullback the first support is 2508 and then the 50-day moving average at 2488.
CBOE Volatility Index® (VIX) 9.61 declined .04 points or -.41% for the week while our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option at 6.20 declined .27 points or -4.17%.
VIX Futures Premium
The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts.
With just 2 trading days until October expiration, the day-weighted premium between October and November allocated 10 % to October and 90% to November for a 21.96% premium, right near the middle of green zone between 10% and 30%.
21.96% vs. 23.68% week ending October 6.
The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration.
Nexflix, Inc. (NFLX) 199.49 advanced 3.63 Friday and up 1.47 points or +.74% for the week, but up 20.30 points or 11.33% from October 3 when it bounced off the 50-day moving averge quickly advancing in anticipation of the 3Q earnings report today after the close. With a consensus earnings estimate of .32 and a whisper estimate of .34 the important revenue estimate is 2.97 bn. As usual speculators, traders and investors will all be closely watching the number of new subscribers added in the US and globally.
First, the volatility chart shown in Digest Issue 39 "Volatility Kings 3Q 2017 [Charts]" as of September 29 when it closed at 181.35 with the arrows showing quick implied volatility declines after previous quarters report dates.
Now the current volatility chart.
With a current Historical Volatility of 29.44 and 23.54 using the Parkinson's range method, with an Implied Volatility Index Mean is 43.05 down 1.29 Friday at .63 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 1.83 so option prices are moderately high relative to the recent movement of the stock using the Implied Volatility Index Mean, IVXM. Friday’s option volume was 212,635 contracts with the 5-day average of 119,850 contracts with reasonable bid/ask spreads. Looking at the October 20 weekly options that expire Friday the at-the-money mean implied volatility is 72.13 making the IV/HV ratio much higher for the October 20 near-term options at 3.06.
This chart shows the stock price advance up from 179.19 on October 3 anticipating the report.
Last quarter it gapped higher on the report. Will it do the same this quarter? October 20 implied option prices suggest a 3.4% or 6.75 point move either direction. Using the average call and put implied volatility at the 200 strike of 72.13 divided by the range historical volatility of 1.83 is 3.06 considerably above the IV/HV ratio upper risk limit at 2.00 for a calendar spread that's short the near term and long a deferred month with high gamma.
Perhaps the better alternative is to wait about two weeks until the implied volatility declines back to about 25 as shown in the volatility charts above and then use a calendar spread that's long the front month and short a deferred month and close it before the next report date as the implied volatility reaches its next quarterly peak.
While most indicators remain solidly in the bullish camp advancing major indices into earnings reporting implies expectations are high with the market in overbought territory. Is this is good as it gets? Calm before the storm? Rembermer regression to the mean. Look at these options volume and open interest charts for the SPX reflecting little concern about upcoming earnings reports based upon the put volume and open interest shown in orange.
One noteworthy cautionary exception, the DJ Transportation Average ETF (IYT) 178.76 declined 1.87 or -1.04% Friday making a key reversal wide outside range bar. However, with low volume of 155K or about half normal around 300K, the significance was diminished. Nevertheless, from a Dow Theory perspective, watch IYT this week for any further sign weakness.
Summary
Although a cyclical decline is overdue most indicators remain bullish and by most measures, the S&P 500 Index along with the other major indexes are overbought going into 3Q earnings after making multiple new highs. However, until our indicators begin flashing caution signs the equity markets remain solidly bullish expecting another quarter of positive earnings reports.
Disclaimer: IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter ...
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