NEW YORK, April 22 Options investors expecting a big move in Netflix shares after the video streaming service posted earnings didn't get what they wanted, and they're fleeing en masse on Tuesday.
Headed into Netflix Inc's earnings after the close of Monday's trading, the expectation was for the stock to move by about $39 a share, or about 11 percent, by the end of the week. That's a bit boring by Netflix standards, as the stock has averaged a move of about 18 percent in the last six quarters the day after reporting earnings.
However, on Tuesday, Netflix was up just $17.51 or 5 percent at $366, well short of the usual move, disappointing those who were looking for a lot of volatility that could carry the stock close to $400. The heaviest activity in Netflix options expiring this week was in far out-of-the-money options, contracts that profit only if the stock's price moves dramatically.
"With the event now out of the way, implied volatility is imploding, and many of the significantly aggressive out-of-the-money puts and calls played ahead of earnings have turned to big losers," said Ryan Detrick, an analyst at Schaeffer's Investment Research in Cincinnati.
With the chances of a big rally now diminished, traders are selling options as fast as they can. The busiest weekly call option contract was the $400 strike, with more than 3,400 contracts traded, but the price has fallen 77 percent to 72 cents a contract from $3.10 on Monday.
For Greg Harmon, chief investment officer of Presidium Capital in Shaker Heights, Ohio, this worked out profitably - coming into the earnings report, he had sold far out-of-the-money put and call options, collecting the premium on that sale, and bought call options betting on a smaller move.
"The historic move was equal to about $60, so many were looking for more" volatility, he said.
The action in far out-of-the-money put options (contracts that bet on a fall in the stock, rather than a gain) is more stark. Investors betting the stock would fall to at least $340 are sunk - those put options traded at $15.44 per contract Monday - and now are worth just 54 cents.
In absolute numbers, since every options contract represents 100 shares, the 1,837 outstanding $340 weekly puts were worth about $2.83 million at Monday's close. Now they're worth just $99,000.
The action in the bullish call options suggests people see a tougher road for Netflix to get to $400 a share. Several weekly call options that were out of the money on Monday and are now profitable on Tuesday have actually fallen in value, which is not usual when options move into the money.
"It means you overpaid," said Andrew Wilkinson, chief market strategist at Interactive Brokers in Greenwich, Connecticut.
"Premiums were boosted whether they were a put or call because (traders) were frightened there might be a huge move," he said. (Reporting by David Gaffen; Editing by Jan Paschal)