Welcome to the second episode of Crush the Open! Each Monday ahead of the opening bell, join me, Joy of the Trade’s Jeff Zananiri, and my boy from the New Money Crew, Lance Ippolito!
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Each Monday, we’ll get started by having some fun, and then we’ll dive in to plot out the week and discuss any market-moving economic data that’s coming. This week, that’s earnings — we have both Tesla and Netflix coming up in addition to those boring old bank stocks that Lance hates…
Crush the Open: Don’t Get Crushed by Implied Volatility in Netflix
We had a super bullish day off Thursday morning’s Consumer Price Index number that showed inflation is still running hot, even after all of the interest rate hikes.
The stock market has been bad, falling hard most of the year, and neither Lance nor I have been picking the bottom — we just trade what’s in front of us.
Picking bottoms is for talking heads on CNBC, so here’s the thing… You don’t have to pick bottoms if you’re always hedged — and you should be. If you’re long only and just looking for places to hide, you’re likely going to get killed.
So being hedged at all times is key, like we are in my Link Trades strategy, but let’s talk earnings plays…
Netflix Inc. (Nasdaq: NFLX) is reporting Tuesday before the opening bell, and it has an expected move of plus or minus 12.6% on earnings. Netflix has had a habit this year of pre-warning everyone that earnings weren’t going to be good.
We all know this, and that’s why this former $400 stock is now trading around $250 after a BIG surge of more than 8% Monday. But if we look at its last four earnings dates, it’s been surprising to the upside in earnings per share (EPS)…
- Q3 2021 EPS % surprise: 24.61% — stock fell 2.17%.
- Q4 2021 EPS % surprise: 64.60% — stock fell 21.79%.
- Q1 2022 EPS % surprise: 21.47% — stock fell 35.12%.
- Q2 2022 EPS % surprise: 18.70% — stock rose 7.35%.
So as far as earnings plays, don’t try this at home, kids, because you could get crushed. And here’s why…
Implied volatility (far right column) is high, and even the puts are super expensive… That’s because most investors are long the stock, so they’re purchasing downside protection with puts, making them more expensive…
To me, this stock is not tradeable with that kind of implied volatility — an important lesson for you reading and watching along at home! The problem with high implied volatility like this is if the stock starts going higher, the volatility comes down, eating at your return.
So let’s say you get this trade right… you won’t make much money. It has to move a ton in the right direction in order for you to come out ahead.
And if you get it wrong, you’ll get taken to the cleaners. So this trade just isn’t worth it from a risk-reward perspective because the risk is so skewed in part by the high implied volatility.
Check out Crush the Open up top and let’s talk about a few more earnings plays like Target Corp. (NYSE: TGT), and a better way to play Tesla Inc. (Nasdaq: TSLA) earnings via the Nasdaq.
Because here’s the thing… we’re so oversold right now, if we get a rally in the Nasdaq 100 (QQQ), it’s not going to move 1%… It’s likely to move 5% or more in a matter of days.
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- The Russia-Ukraine war continues to escalate.
- OPEC cut production by 2 million barrels a day.
- Strategic Petroleum Reserves hit new 40-year lows.
- The Nord Stream pipeline was just sabotaged.
- Energy prices in Europe are up 700%.
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Those who play it right could stand a chance to collect a windfall over the coming months. So at 1 p.m. EDT on Tuesday, Oct. 18, I’m issuing my No. 1 Energy Supercycle Play LIVE so you can take advantage of the upcoming opportunity.