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Netflix, Inc. (NFLX) Options Expose Market’s Anticipated Move After Earnings Report

Netflix, Inc. (NASDAQ:NFLX) is subject to more intense scrutiny as the company is expected to report its latest quarterly performance after the market closes tomorrow, April 15th. As the event draws closer, Stacey Gilbert of Susquehanna International Group, LLP breaks down how much Wall Street is expecting the company’s stock to move after the report based on the options market.

According to Gilbert in her discussion on CNBC, the close-to-close price basis Netflix, Inc. (NASDAQ:NFLX) has had in the last eight quarterly reports it has released reveal that the stock has moved anywhere from 4.5% to 24.4%.

To glean insight as to how much the Street is expecting the company’s stock to move after its quarterly report tomorrow, Gilbert shows CNBC viewers Netflix, Inc. (NASDAQ:NFLX)’s options reports, specifically the options which will expire on Friday, April 17, or two days after the company’s event.

“The reason I’m concentrating on this expiration is with Netflix expected to report earnings on the 15th, and these options expiring two days later, the majority of the options pricing is attributable to earnings. That is the biggest event for Netflix shares this week so most of this pricing is going to be reflective of anticipation surrounding Netflix earnings,” Gilbert explains.

As shares of the company closed at $454.57 per share on Monday, Gilbert says she is specifically looking at the “at-the-money strike” or the calls closest to where the stock price closed on Monday. The “at-the-money strike,” the analyst points out, is the $455 option. She clarifies that looking at this data is not to bring out an opinion about the stock’s direction, it is about knowing how big a move the stock could make after its quarterly report.

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Gilbert proceeds to look at the price of both calls and puts which, when bought by an investor, make up a strategy called a “straddle”. Buying the calls and puts gives an investor exposure to both the upside and downside of the stock. She notes that calls sold at $22.55 each and puts sold at $22.70 each. The net for a “straddle” strategy is $45.25, Gilbert points out.

“That means Netflix shares have to move plus or minus $45.25 from current levels in order for me to break even on this trade. That’s roughly a 10% move in either direction. So what this strategy really represents is the market’s best guess at how much Netflix shares may move. Specifically, to get technical, […] it’s roughly a 60% probability that Netflix shares will close between 0% and plus or minus 10% on Friday after it reports earnings,” Gilbert says.

According to data from Nasdaq, Netflix, Inc. (NASDAQ:NFLX) consensus earnings per share forecast is $0.68.

Carl Icahn’s Icahn Capital LP owned about 1.41 million Netflix, Inc. (NASDAQ:NFLX) shares by the end of 2014.

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