Home » Earning Season Kicks-off With Netflix and Tesla The Week of January 22, 2024

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Earning Season Kicks-off With Netflix and Tesla The Week of January 22, 2024

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1/21/24

#Stocks – $NFLX, $TSLA

#Macro – $spx

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I have to be honest; my mind isn’t on the market today. I look forward to watching the Chiefs and Bills play at 6:30 ET. The Chiefs have killed the Bill’s chances to advance in the playoffs the last two years, and this will be the first time these two get to play in Buffalo and not in Kansas City. I think the Bills playing at home should give them the advantage, and I hope to see them advance.

But then again, my critics say they always do the opposite of what I think and that I am always wrong, so does that mean I should think the Chiefs will win? Because then, really, it means the Bill will. Now I’m confused.

Anyway, there are a few things on markets that I have come across over the past few days. The first and most obvious is that OPEX is now behind us. The flows that have supported the S&P 500 and NASDAQ are pretty much behind us.

It is clear to me that today’s options market is more important than ever. If you aren’t paying attention to the positioning of the options market, I think you are doing yourself a great disservice. It isn’t just about the biggest call-and-put positions but also about the direction of implied volatility and, more importantly, where the gamma and delta positions are.

We can try an experiment this week and see how it goes. Netflix and Tesla are reporting results, and what the companies say may not affect where the stocks go following their results. What may matter more is where and how the options are positioned, and we can do fairly easy exercises to see if this proves right or wrong. Let’s start with Netflix, and let’s not even worry about the earnings and estimates; instead, let’s focus on how the options market is positioned. Mind you, today is Sunday, and positioning can change some between now and these results. Remember, this is for fun.

NETFLIX

Netflix closed around $483 on Friday, and when looking at the SKEW based on the LIVE data from Bloomberg by strike price, it is fairly easy to see that Implied Volatility for the January 26 OPEX is skewed to the calls, with IV rising consistently, the higher strike prices go.

(BLOOMBERG)

We can also see that a great amount of call delta for the stock comes at $500, which means that there is a good chance, given that IV skewed higher and to the calls, that most of that Delta is due to investors buying call positions, which means that market makers are hedged long in Netflix.

(BLOOMBERG)

So, in theory, how this could work is that Netflix reports results that are, let’s say, in line or slightly better. Once the results hit the tape, IV for all those calls at higher prices will come crashing down, making the value of the calls drop as well. This means that the notional value of the call declines and that if those calls decline in value, then market makers can trim their long hedges in the stock, and the stock price will fall. Now, if Netflix reports blowout results, then the dynamics of the options market will probably get run over. Still, it means that an in-line quarter or even a slightly better quarter probably results in the stock dropping after the results. The way I would put it is that there is a 2 out of 3 chance the stock goes down following the results. Because the company will either miss, meet, or beat results.

Tesla

For Tesla, it is the opposite, and it was a bit harder to work out because there is a lot more option activity for the February 16 Option expiration date than January 26. But here, the Skew and the demand is to own puts.

(BLOOMBERG)

Also, the deltas are very put-heavy, meaning market makers are probably hedged short. Once results come out for Tesla, the IV will also drop, which will make the puts lose value, and that could result in the market makers covering shorts in Tesla, pushing the shares higher. Again, the odds seem to be that the stock moves higher in 2 out of 3 cases.

(BLOOMBERG)

Nothing is infallible; this is all just looking at option positioning rather simply. I think I am just trying to demonstrate the importance of that positioning. Maybe it works or doesn’t; we can find out together during the week.

-Mike

Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.