Netflix, Tesla Earnings to Tell Market's Next Move - Watch Options Market for Cues
Michael Kramer | Jan 22, 2024 15:35
There are a few things on markets that I have come across over the past few days. The first and most obvious is that OPEX is now behind us, meaning that some of the flows that have supported the S&P 500 and NASDAQ are, likewise, behind us.
It is clear to me that today’s options market is more important than ever. If you aren’t paying attention to the positioning of the options market, I think you are doing yourself a great disservice. It isn’t just about the biggest call-and-put positions but also about the direction of implied volatility and, more importantly, where the gamma and delta positions are.
We can try an experiment this week and see how it goes:
Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) are reporting results, and what the companies say may not affect where the stocks go following their results.
What may matter more is where and how the options are positioned, and we can do fairly easy exercises to see if this proves right or wrong. Let’s start with Netflix, and let’s not even worry about the earnings and estimates; instead, let’s focus on how the options market is positioned. Remember, this is for fun.
h2 Netflix Closed Around $483 on Friday/h2Netflix closed around $483 on Friday, and when looking at the SKEW based on the LIVE data from Bloomberg by strike price, it is fairly easy to see that Implied Volatility for the January 26 OPEX is skewed to the calls, with IV rising consistently, the higher strike prices go.
We can also see that a great amount of call delta for the stock comes at $500, which means that there is a good chance, given that IV skewed higher and to the calls, that most of that Delta is due to investors buying call positions, which means that market makers are hedged long in Netflix.
So, in theory, how this could work is that Netflix reports results that are, let’s say, in line or slightly better. Once the results hit the tape, IV for all those calls at higher prices will come crashing down, making the value of the calls drop as well.
Get The App
This means that the notional value of the call declines and that if those calls decline in value, then market makers can trim their long hedges in the stock, and the stock price will fall.
Now, if Netflix reports blowout results, then the dynamics of the options market will probably get run over. Still, it means that an in-line quarter or even a slightly better quarter probably results in the stock dropping after the results.
The way I would put it is that there is a 2 out of 3 chance the stock goes down following the results. Because the company will either miss, meet, or beat results.
h2 Tesla Shares Might Push Higher on Short-Covering/h2For Tesla, it is the opposite, and it was a bit harder to work out because there is a lot more option activity for the February 16 Option expiration date than January 26. But here, the Skew and the demand is to own puts.
Also, the deltas are very put-heavy, meaning market makers are probably hedged short. Once results come out for Tesla, the IV will also drop, which will make the puts lose value, and that could result in the market makers covering shorts in Tesla, pushing the shares higher. Again, the odds seem to be that the stock moves higher in 2 out of 3 cases.
Nothing is infallible; this is all just looking at option positioning rather simply. I think I am just trying to demonstrate the importance of that positioning. Maybe it works or doesn’t; we can find out together during the week.
h2 The Free YouTube Video:/h2
Original Post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.