Editor’s note: Lance is out this week but don’t worry, he’ll be back Friday, Sept. 1. We’ll run some of his timeless investing tips in his absence.
I don’t know about you guys… but I’m trading small in size right now. Sure, I have a ton of positions on, but almost all of them are five contracts or less.
It’s not my favorite way to trade, but I’m decently hedged and I feel good about my book as a whole right now.
It’s a big week for earnings with Netflix having reported Tuesday, April 18, after the close, and Tesla coming Wednesday after the close.
We looked at Netflix Inc. (Nasdaq: NFLX) this week to see if it was a good earnings trade idea… So I pointed out prior resistance around $375 (the upper pink line), and prior support around $300 (the lower pink line) with the stock trading around $338 on Monday morning.
Market makers are projecting about a $30 move up or down in response to the company’s earnings report, which is an “unknown event,” by Friday’s expiration of the weekly options.
So I’m looking at about $368 to the upside, or $308 to the downside for my calculations.
Now here’s the most important part…
Looking at the price of the options, the $300 puts were about $2.50 on Monday morning. That’s kind of expensive to me because I like trading options that are around $1.00 a contract — cheap options!
And to the upside, the $370 calls were $4.40…
This is called a “call skew,” which means the calls are priced higher than puts. This is actually shocking because puts are often more expensive because they can be used for hedging as insurance — downside protection — for large stock positions in case it tanks post-report.
This tells me that a big majority of people are leaning bullish on Netflix for earnings…
And oftentimes when everyone is of the same mind on something, the market tends to do the complete opposite.
To me, this is a dice roll, which can be fun to do because I love rolling the dice sometimes…
But probably the best thing to do in this instance is… nothing — outside of more advanced trading strategies like iron condors, iron flies or selling premium. This is a trade I wouldn’t take outside an all-or-nothing dice roll in a super small position.
So keep these calls skews in mind next time when you’re looking over potential earnings plays.
Lance Ippolito
Lance Ippolito Trading
