Do Options Traders Tend to Underestimate NFLX Earnings Moves? A Market Chameleon Analysis

Articles From: Market Chameleon
Website: Market Chameleon

NFLX Earnings Stock Reaction: Market Expectations vs Actual

Investors and traders often look to earnings announcements as key events that can cause significant stock price movements. One intriguing way the market signals its expectations for a stock’s post-earnings price reaction is through the pricing of options, particularly straddles.

With Netflix’s (NFLX) stock recently soaring 10.7% post-earnings, two interesting questions arise:

1. What did the market expect for Jan 23 earnings?

2. Does the market tend to underestimate or overestimate NFLX’s earnings moves? 

To help answer this question we will compare historical implied moves against NFLX actual moves.

A Historical Visualization: NFLX Implied Earnings Moves vs Actual

A Historical Visualization: NFLX Implied Earnings Moves vs Actual

When interpreting the chart provided above, note the following: the up/down brackets represent the historical expected moves based on option prices. The green bars extending upwards indicate actual up moves, while red bars descending show actual down moves.

If a colored bar exceeds the bracket, it indicates that the actual move was larger than what the market priced in before the announcement.

Market Chameleon Provided A Summary Of The Data

Market Chameleon Provided A Summary Of The Data

source: Market Chameleon

History Shows The Market Tended To Underprice NFLX Earnings Moves

Our analysis reveals that the market underpriced NFLX’s moves 54% of the time. Historically, the market implied a move of +/- 8.8%, while the actual average move was around 11.9%. This differential of approximately 3% is substantial in options trading.

Latest Earnings: History Was On Your Side

The most recent pre-earnings straddle for NFLX implied an 8.2% move. The stock surged by 10.7%. Traders who leveraged these historical patterns found themselves at an advantage.

Conclusion

Analyzing historical data can offer valuable insights into potential market behaviors. In the case of NFLX, earnings moves have historically been dramatic, averaging a significant 11.9% change. It appears that traders have frequently underestimated the actual moves. Utilizing these historical benchmarks can be a crucial strategy for planning potential trading approaches, especially when considering recent earnings releases.

Originally Posted January 24, 2024 – Do Options Traders Tend to Underestimate NFLX Earnings Moves? A Market Chameleon Analysis

NOTE: Stock and option trading involves risk that may not be suitable for all investors. Examples contained within this report are simulated And may have limitations. Average returns and occurrences are calculated from snapshots of market mid-point prices And were Not actually executed, so they do not reflect actual trades, fees, or execution costs. This report is for informational purposes only, and is not intended to be a recommendation to buy or sell any security. Neither Market Chameleon nor any other party makes warranties regarding results from its usage. Past performance does not guarantee future results. Please consult a financial advisor before executing any trades. You can read more about option risks and characteristics at theocc.com.

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