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ORATS Analysis: Is Netflix About to Surprise Again? Why Investors May Be Underestimating Earnings Volatility

As Netflix approaches its Q3 earnings report after the market closes today, options market data indicates a relatively modest move. The current implied earnings move — derived from straddle prices — is 7.4%, signaling that investors are expecting a limited reaction. However, based on historical data, Netflix has a pattern of delivering larger-than-anticipated moves, and there is potential for the stock to deviate from this conservative expectation. https://orats.com/blog/orats-analysis-netflix-earnings-investors-underestimating-volatility

Implied Move vs. Historical Reality

Netflix has a history of exceeding implied moves, particularly after periods of modest earnings reactions. Speaking of modest reactions, the last earnings report delivered a much smaller actual move of -1.5% than the implied move of 8.4%. This meager reaction likely explains why the implied move for today’s earnings is 7.4%, well below the average absolute earnings move of 11.4% for the past 12 quarterly earnings announcements. However, key historical examples suggest the market could be underpricing the potential for volatility.

• In October 2021, Netflix moved just 2.2%, far below the implied move of 5.6%. The following quarter, however, Netflix delivered a significant 21.8% move in January 2022, exceeding the implied move of 7.4% by a large margin.
• A similar pattern occurred in April 2023, where Netflix’s actual move was 3.2%, compared to an implied move of 8.4%. In the subsequent quarter, the stock moved close to expectations.

These examples illustrate that Netflix has a history of unpredictability around earnings, particularly following quarters with lower-than-expected moves. While the implied move for today suggests a more minor reaction, historical data indicates that Netflix may surprise the market with a more significant swing.

How We Calculate the Expected Move

ORATS uses the straddle of the strike closest to the stock price for the first expiration after earnings. With NFLX near $695, that strike is used, and with earnings tonight, the closest expiration after earnings is Oct 18th. The straddle call price plus the put option price is $51.80 or 7.5%. The straddle calculation has a residual value depending on how many days are left after expiration, in this case, one day, and where the IV is expected to fall. This trims off a little from the raw straddle price to get the earnings move attributable to the earnings announcement.

Historical Volatility and Earnings Risk

While the market has priced in a 7.4% move for today’s earnings, Netflix has consistently shown a higher average move of 11.4% following earnings announcements. Historically, Netflix has been a riskier stock during earnings season, and the current implied move may be underestimating that risk. After quarters where Netflix has had smaller moves — like in October 2021 and April 2023 — the subsequent earnings reports tended to deliver larger-than-expected moves, as seen in January 2022’s 21.8% move.

For traders, it’s essential to recognize that while recent moves have been more subdued, Netflix remains a stock that can produce significant post-earnings surprises. This historical behavior makes it a potentially volatile asset around earnings, even when the implied move appears conservative.

Conclusion

As Netflix prepares to report earnings today, the implied move of 7.4% is lower than the stock’s historical average, likely due to the more minor move in the last quarter. However, Netflix’s past performance suggests that it has the potential to deliver larger moves than currently anticipated by the market. Historical data shows that Netflix has surprised with significant volatility after periods of muted earnings reactions, and this trend may repeat itself.

Traders should be aware that while the market has priced in a conservative move, the risk of a larger swing remains high, based on Netflix’s earnings history. Careful consideration of both the implied move and historical performance is vital to understanding the potential risks and rewards as Netflix announces its earnings today.

ORATS Analysis: Is Netflix About to Surprise Again? was originally published in Option Research & Technology Services on Medium, where people are continuing the conversation by highlighting and responding to this story.