Jenny: Hi everyone, welcome back to the LIZ and JNY show. This is Know Your Options.
Liz: Today we’ve got earning in Netflix after the close I believe. You know what, we’re going to take Know Your Options and breakdown just an earning stream that we’re going to do in all of our own accounts.
Jenny: Yeah, right. Let’s go to the Tos Platform. I've got Netflix pulled up. It’s funny because. Netflix, we’ve been trading this for a long time. We had years ago have been burned in Netflix. It had a significant move.
Liz: Netflix moves.
Jenny: Since then, we have always done a chicken a Netflix. Since then we've always done a chicken in Netflix, they’ve worked out. They’ve worked out to the point where it was up in the morning. We bought back our short then it came down. We've made money on both sides. We’ve always done. I woke up thinking, “We’ll do a chicken in Netflix.” You just have to listen and Liz is like, “Hey let’s do a Jade Lizard.” I thought, “Hey why not?”
Liz: Do you know what though? Is it worth looking at both for the risk definition? I didn’t look at a chicken. I didn’t even see if a chicken sat down.
Jenny: I do. It’s what we’ve done in Netflix ever since. It’s what we’ve always done in Netflix.
Liz: We’ve got 14 minutes. Let’s take a look at both. It’s a one time.
Jenny: I don’t mind doing the Jade Lizard.
Liz: We know what our Jade Lizard strikes are and we know what it looks like. Let’s take a look at and see how far we can get with a chicken. We should be able to push the downside.
Jenny: I want to see what cycles we can use. I can see the IB percentile, the rank is 82 based on a 60. Anything over, we could use the 17 day, the 10 day, the 3 day. We’ll use any of those.
Liz: Right. We know we can use any of those volatilities. Now typically with the chicken, we want to stick with the three day, right?
Jenny: The one that’s expiring right away?
Liz: The one that’s expiring right away, don’t we with the chicken?
Jenny: Sure. A Chicken Iron Condor is it’s risking one to make one. We’ll risk one to make one if we can get our short strikes to the expected move. Let’s see if it works.
Liz: These are the 50/50 chance of success. Let’s just really take a look. These are $2.50 win strikes.
Jenny: The expected move is $36 and we go down $36. That would be bring us to about the 302.5, 300 put spread.
Liz: It’s 50 cents. We know we need more than that on a call spread but typically you will.
Jenny: Then if we go $36 up, it brings us to about the 370. That call spread there’s a 251 call spread and we’re going down 15. Half would be down 25.
Liz: Very close. This is close to risking one to make one. Short strikes are at the expected move if it stays within the expected move, this expires this week. You make 115 and you risk 135.
Jenny: I feel like if you have a small account and you don’t want to take on a lot of risk, this is the type of earnings play that I would look to if I had a little account. You know what? I'm just going to look at this.
Liz: You have the breakevens.
Jenny: I know the breakevens. That’s just the thing is that I think you hit the nail on the head when you say account size, account size has a tendency to dictate what you should or shouldn’t be doing. If you have a small account, you don’t want to risk everything in Netflix. I know that doing these defined risk spreads, yes this looks great on paper but there’s a good chance that you're not going to make any money or you might wound up losing your max loss on this and that’s okay.

It’s trickier to make money doing these defined risk positions. Sometimes you have to create. I'm not saying with this particular trade. I'm not even saying with this earning cycle. I'm just saying you have to increase your probability of success by creating some naked positions in order to the corner.

I really, really, really hope people can extrapolate the fact that I'm not talking about this particular naked option.
Liz: No, but I think it’s a good lesson. Hey here’s the difference. Here’s defined risk, risking 135 trade to 115. Our breakevens are also at the expected move. You see our breakeven is 301 and it’s trading to 338 and the expected move is $36. On the upside 371 and the stream 338.

We’ve got our breakevens far enough. You're risking a small amount. You're going to break the bank if you lose on this. This is playing for a move to be within the expected move. If I had a small account this is the type of trade that I'll be looking at. This is the type of trade we’ve been doing in Netflix ever since we got burned.
Jenny: Ever since we got burned.

Liz: This is the first time we’re willing to step out of this type of trade for earnings in Netflix.
Jenny: The funny thing about it is that could we get burned again? Sure but looking at the breakeven getting ourselves so far away from where it was, it’s okay. I'm comfortable with it.
Liz: Yeah. We’ll compare this and what Liz was looking at is that breakeven in the downside because in Jade Lizard, we have no breakeven on the upside.
Jenny: No.

Liz: Even on the downside, here it’s 301. We have no risk on the upside but we’re going to have undefined risk to the downside below our breakeven.

Jenny: Yeah, here it is 301 and the Jade Lizard, it’s $25-$30 lower.

Liz: I'm going to now take a look …

Jenny: It will only disillusion you, $25-$30 in Netflix.

Liz: It can move that much.

Jenny: Isn’t something to think that you’ve got a big cushion for.

Liz: Let’s take a look at the Jade Lizard and with the Jade Lizard we actually had to go out to the 17 day. If we are comparing apples to apples in breaking the breakeven, to be fair we should look at the 17 day.

Jenny: We should go to 17 day. I'm going to 17 day. Go ahead. Are you doing the Jade Lizard?

Liz: Here’s a Jade Lizard. We were looking at selling that to …

Jenny: What were your short strikes? Do you remember that it was 300?

Liz: 302

Jenny: Then what was the top strike? 370?

Liz: About 370. Selling that 275 put and then adding out a call spread.

Jenny: In the 17 day you actually get less.

Liz: How much did you get?

Jenny: 112. Market’s are pretty wide though.

Liz: Markets are wide. On the call side, we went up to about also the same thing right around 370. That’s a lot. You can move it. The [inaudible 00:06:27] this wide so it’s a little tricky but we can move.

Jenny: What Jen is looking at is if you're looking at a Jade Lizard, all you can get $2.50. $3.23 is excessive. I know it’s not excessive but what she’s saying when she says that’s not is that you can widen yourself out and still make sure that your are defining the risk. You connect the put down strike and see what happens.

Liz: You can take the put down.

Jenny: You can take it to another strike.

Liz: The put’s where the risk is. Oh, wait.

Jenny: Yeah, 265. That brings your breakeven to 262.

Liz: Well then we need to put the little over 235.

Jenny: Then go up to the 270.

Liz: 265, 270, so 317. That 370, 372 and that call spread. We need Netflix to stay to not really run our path beyond. Netflix is trading tomorrow around 370, 372. This cost spread will be worth 215.

Jenny: Do you want to know why we can get so far in Netflix? The volatility is so high in there and it has moved so much in the past that this is just two times its expected move. Has Netflix moved two times?

Liz: It’s expected move in the past? Yes.

Jenny: Oh down to the 270?

Liz: Yes.

Jenny: Yeah, right.

Liz: The reason that you can collect all this is because the options are pricing a move in.

Jenny: Yeah. Like you said, can it move two times its expected move? Sure. Where is our risk in this? Let’s go to confirm and send in take a look. Our risk is you’ve got a short strike of 270 minus that 317 we collect. So 266.88 is where our breakeven would be and one for one below.

Liz: One for one below that. We almost have cushioned then about a two times expected move. Now two standard deviations, I'm not saying that almost two times the expected move of 36.

Jenny: No.

Liz: I don’t want to disillusion them that’s a comfort level.

Jenny: That’s right. We had breakeven at 300 and right around 300 and then 370 something. Here our breakeven, we have one breakeven and it’s at 266. This is a higher probability of trade. This is why Liz said at some point, you have to break away from those defined risk and move on to higher probability trades. We’re not saying this is the time to do it.

Liz: I would highly advise this is not the time to do it but here you get a higher probability trade, one breakeven and it’s $35 lower than where it was with that defined risk but you have undefined risk and tying up almost $3,000 in buying power.

Jenny: The chicken was created because of Netflix I believe.

Liz: I believe it was created because we know you understand your risk at order entry and typically when you're wrong, typically if it’s an understated move, it’s an understated move. If it’s an overstated move, it’s an overstated move. Then look out and get your helmet on because if it’s going to move, it’s going to move. It’s never $46.

Jenny: Netflix is the one where we’ve put down on a chicken. There’s [inaudible 00:09:17] that. We ran out.

Liz: Shot through.

Jenny: We bought back our short put because we could buy that back for a nickel and we left our long and then it dropped right back down and we made money on both ends.

Liz: Yep. Netflix instantly we turned into only a $250 winner to $800 winner.

Jenny: Yeah, because it was $5 wide risking. Collecting $250 on a $5 wide and we ended up making a $5 wide put debit spread. We turned that $250 potential chicken into an $800 winner.

Liz: Right.

Jenny: The reason we remember that so clearly is because it was one of the better earnings plays.

Liz: Do you like the chicken in Netflix or do you want to go?

Jenny: I definitely like the 266 breakeven versus 300 and 370, one breakeven and double the expected move down, 266. Then I have to ask myself, self … let me change this to a three year chart. Self, do I want to own Netflix? Would I be comfortable owning Netflix? Down here. This is the level of where I've known Netflix. This is a three year chart.

Liz: So a year and a half ago.

Jenny: Self, draw it on Netflix right around there.

Liz: Look at those drops. Do you see this?

Jenny: Yeah.

Liz: This is when I say south, I might just do the chickens.

Jenny: This was three years ago.

Liz: This is a three year chart. Netflix has changed a lot since then certainly. I like Netflix, I use Netflix. I like their new series. They do have more competition now than they used have. I'm personally going to do a chicken because I want to own Netflix at 266.

Jenny: It’s so hard though when you talk about it because the probabilities are the probabilities right?

Liz: If our earnings …

Jenny: Our earnings, it is a different animal and I will give you that. You know what else is enticing too when you look at the buying power? It’s either I'm going to put up $3,000 that’s why we talk about if you have a small account, you don’t want to be doing things like this because you're either putting $3,000 or $135,000.

Liz: Well you know what, I've been through this. I've lived through this. I lived through this day here, you know what I mean? Do I want to do that in Netflix? No. There’s nothing wrong with trading Netflix and there’s nothing wrong with the Jade Lizard. I'm just not personally going to do it because I don’t want to worry about it.

Jenny: The other aspect of this, oh absolutely. I think especially with something that you’ve been burned in the past. Why don’t we talk about get to know your products?

Liz: Get to know your products.

Jenny: Get to know your products. This is a product that is, this is a gunslinger and that there’s a reason that you can get a two times expected move out of the way each side. Even when we’re doing Jade Lizards, you can never get that far up, that far down except if there’s a reason.

Liz: I know. There’s a reason. You're going to see making a small trade often. Put down an undefined risk trade in IBM and I'm going to think twice about it. In Netflix I'm going to think twice about it only because we get emails like this all the time. Here’s an email we get all the time. We place high probability trades and we make money, make money, make money, make money and then we have a one day loser that wipes out 10 winners.

I'm not saying this is going to be the case but I don’t want Netflix to be that one. I'm going to do defined risk in Netflix because of the product.

Jenny: I don’t mind. I actually make more money than a $1.25. That’s my major issue right now.

Liz: We’re out of time. We’re going to talk about this during the commercial break and we’ll be back with Trade Small Trade Often. All right, just stay tuned.