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IVolatility Trading Digest™

Volume 17 Issue 41
Netflix Volatility King [Charts]

Netflix Volatility King [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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With 3Q earnings reporting underway this seems this like a good time to update and expand upon Digest Issue 39 "Volatility Kings 3Q 2017 [Charts]" with another look at Netflix (NFLX) scheduled to report after the close today. First a brief market review.

Review NotesS&P 500 Index (SPX) 2553.17 advanced 3.84 points or +.15% for the week after making a new closing high Wednesday at 2555.24 and new intraday highs every day except last Monday. While it appears overbought and overdue for a cyclical pull back most indicators remain bullish. In the event of a pullback the first support is 2508 and then the 50-day moving average at 2488.

VIXCBOE Volatility Index® (VIX) 9.61 declined .04 points or -.41% for the week while our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option at 6.20 declined .27 points or -4.17%.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.

With just 2 trading days until October expiration, the day-weighted premium between October and November allocated 10 % to October and 90% to November for a 21.96% premium, right near the middle of green zone between 10% and 30%.


21.96% vs. 23.68% week ending October 6.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration.

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Nexflix, Inc. (NFLX) 199.49 advanced 3.63 Friday and up 1.47 points or +.74% for the week, but up 20.30 points or 11.33% from October 3 when it bounced off the 50-day moving averge quickly advancing in anticipation of the 3Q earnings report today after the close. With a consensus earnings estimate of .32 and a whisper estimate of .34 the important revenue estimate is 2.97 bn. As usual speculators, traders and investors will all be closely watching the number of new subscribers added in the US and globally.

First the volatility chart shown in Digest Issue 39 "Volatility Kings 3Q 2017 [Charts]" as of September 29 when it closed at 181.35 with the arrows showing quick implied volatility declines after previous quarters report dates.


Now the current volatilty chart.


With a current Historical Volatility of 29.44 and 23.54 using the Parkinson's range method, with an Implied Volatility Index Mean is 43.05 down 1.29 Friday at .63 of the 52 week range. The implied volatility/historical volatility ratio using the range method is 1.83 so option prices are moderately high relative to the recent movement of the stock using the Implied Volatilty Index Mean, IVXM. Friday’s option volume was 212,635 contracts with the 5-day average of 119,850 contracts with reasonable bid/ask spreads. Looking at the October 20 weekly options that expire Friday the at-the-money mean implied volatility is 72.13 making the IV/HV ratio much higher for the October 20 near term options at 3.06.

This chart shows the stock price advance up from 179.19 on October 3 anticipating the report.


Last quarter it gapped higher on the report. Will it do the same this quarter? October 20 implied option prices suggest a 3.4% or 6.75 point move either direction. Using the average call and put implied volatility at the 200 strike of 72.13 divided by the range historical volatility of 1.83 is 3.06 considerably above the IV/HV ratio upper risk limit at 2.00 for a calendar spread that's short the near term and long a deferred month with high gamma.

Perhaps the better alternative is to wait about two weeks until the implied volatility declines back to about 25 as shown in the volatility charts above and then use a calendar spread that's long the front month and short a deferred month and close it before the next report date as the implied volatility reaches its next quarterly peak.

StrategyWhile most indicators remain solidly in the bullish camp advancing major indicies into earnings reporting implies expectations are high with the market in overbourght territory. Is this is good as it gets? Calm before the storm? Rembermer regression to the mean. Look at these options volume and open interest charts for the SPX reflecting little concern about upcoming earnings reports based upon the put volume and open interest shown in orange.


One noteworthy cautionary exception, the DJ Transportation Average ETF (IYT) 178.76 declined 1.87 or -1.04% Friday making a key reversal wide outside range bar. However with low volume of 155K or about half normal around 300K the significance was diminished. Nevertheless from a Dow Theory perspective, watch IYT this week for any further sign weakness.


Although a cyclical decline is overdue most indicators remain bullish and by most measures the S&P 500 Index along with the other major indexes are overbought going into 3Q earnings after making multiple new highs. However, until our indicators begin flashing caution signs the equity markets remain solidly bullish expecting another quarter of positive earnings reports.

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Actionable Options™
We now offer daily trading ideas from our RT Options Scanner before the close in the IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.

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"The best volatility charts in the business."

The Netflix earnings report changed this week's plan so unless there is an unforeseen event next week we will fire up the rankers and scanners looking for more trade ideas.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

CommentAs usual, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com



could you give us detailed strategies aiming at selling or buying volatility?since it is easier to predict the volatility in comparison with stock prices.
thanks a lot

Posted by christian morio on October 18, 2017 at 03:24 PM EDT


Thanks for your volatility question. The "Some Strategy Ideas" section of Digest Issue 39 "Volatility Kings 3Q 2017" outlined the long and short calendar spreads probably the most popular volatility strategies. Others include Butterflies buying or selling two at-the-money options along with one in-the-money and one out-of-the-money. Remember to watch those reporting earnings, especially those on our Volatility Kings list since implied volatility will likely decline considerably after reporting.


Posted by Jack ( on October 23, 2017 at 03:48 PM EDT

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IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

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