THE GUN: NFLX EARNINGS TRADE

Posted By admin on Apr 24, 2011 | 0 comments

I wrote an article recently describing the 3 reasons I think NFLX will report some blowout numbers when earnings are released tomorrow.

Once in a great while I will put on an earnings play. I do so when I think the odds are heavily slanted in my favor that I will be right. NFLX meets the criteria. I feel that my odds of being successful greatly outweigh my odds of anything catastrophic to the downside following their earnings report.

When I am putting on an earnings play I will always do so in the last hour of trading before the report. I want to make sure I am playing the earnings and nothing else. The last thing I want is to be underwater 5 points before earnings are even announced. Of course, the flip side is that I can pay a premium for the stock going into earnings. It's the yin and yang of trading.

I plan on buying the stock outright instead of buying call options. The premiums on NFLX options are insanely steep. If the stock opens up 1 or 2 points after earnings, odds are that out of the money contracts won't move much due to the premiums being built into the stock. I will get out of the position during the first half hour of trading on Tuesday no matter what the result.

As the stock rises into earnings the chances of a shrug of the shoulders reaction to earnings begins to increase. This is another reason why I don't want to buy call options into the report. Even with an unchanged reaction in stock price to earnings, the option premiums following earnings will decrease in price.

I'll be announcing the trade with a "trade update" during the last hour of trading tomorrow.

NFLX