Hundreds of millions of dollars in option trades related to the biggest American internet giants have resurfaced in US markets, only weeks after the Japanese corporation SoftBank Group was linked to identical bets.
Block trades of call contracts for Amazon.com, Facebook, and Netflix were among the businesses that experienced block trading of call contracts on Thursday, suggesting speculation on stock moves in the first months of next year. Call options are bullish wagers on their own, but they can also hedge other holdings.
The buyer’s identity remained unknown. However, analysts saw a resemblance to SoftBank’s summer bets, which included billions of dollars in call purchases in tech companies. Some experts believe that such “Nasdaq whale” bets, along with a surge in short-dated option buying by individuals and day traders, formed a bullish feedback loop that contributed to the Nasdaq 100’s August gain.
According to Chris Murphy, derivatives strategist at Susquehanna Financial Group, “the nature of the trades paired with the timing certainly has a lot of investors guessing the Nasdaq whale is back in the marketplace today.”
On Thursday, a total of $74.5 million in Amazon call options with expiration dates in January and March changed hands in two block trades. Likewise, about $52 million worth of bullish Facebook options expiring in the same months were traded in two transactions. In addition, almost $25 million was spent on similarly dated Netflix calls in two trades, while $28.4 million was spent on Alphabet positive wagers.
“The firms targeted, the sizes and maturities, and the delta-neutral execution are all quite comparable to those extensively discussed in August,” said Benn Eifert, CIO, QVR Advisors.
Netflix Earnings Moves And Options Preview
Benzinga is the source of this information. After the market closes, Netflix (NASDAQ: NFLX) will release its earnings. The options market is likely to move around 5.5 percent or nearly $29 in either way. According to the Options AI Earnings Calendar, recent earnings have moved -7 percent, +16 percent, and -7 percent.
Whether you’re trying to buy Calls or Puts outright or use Spreads to save money, the predicted move can be a valuable tool in both strategy and strike selection. We’ll look at a few trades that integrate the projected move in the next sections, utilizing Netflix earnings and options expiring this Friday as examples.
Debit Spreads
A trader preparing for a stock move in line with options market expectations, for example, might apply a Call Spread to the projected move. Thus, they are buying Calls with a higher likelihood at or near the money while selling Calls with a lower probability at or beyond the predicted move.
Consider the following scenario: NFLX is currently trading around $535, resulting in a +535/-565 Debit Call Spread. It costs about $10 and can earn you up to $20 on Friday if the stock is at or above $565. It purchases the $535 call for about $15 while concurrently selling a $5 call at the predicted move, resulting in a $10 net debit.
That’s less expensive than buying the 535 Call outright, and there’s a better chance of profit (based on the $545 breakeven). On an Options AI stock chart, the transaction appears like this. The grey line represents breakeven, whereas the red and green sections represent the risk/reward ratio:
A +535/-507.5 Debit Put Spread is the bearish counterpart of a Debit Spread to the predicted move. In the stock, the breakeven point for this trade is $524. It’s profitable below that level, and if the stock is at or below $507.50 on Friday, it’ll make its maximum profit:
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Credit Spreads
Debit Spreads are a strategy to lower the risk of a premium while positioning for directional moves. To be profitable at expiry, they still need to advance past the trade’s breakeven level. Credit Spreads, on the other hand, act as a hedge against a directional move.
Credit Spreads can be easily understood by thinking of them as the inverse of Debit Spreads.
The NFLX -535/+507.5 Credit Put Spread, for example. It is bullish because it is not bearish. You’ll see that it’s the identical transaction as the Debit Put Spread above, except that the trader is a seller rather than a buyer of the spread:
The Credit Put Spread has a breakeven price of $524 in the stock. In other words, the stock doesn’t have to move higher to profit; it just can’t fall lower than its breakeven point. The buyer of the spread is hoping for a decline below $524. The seller hopes it will remain above that level.
Options The projected move, breakevens, and simple risk/reward are at the heart of AI’s chart-based trading. Traders can swiftly create Debit and Credit Spreads depending on the projected move or combine them with other multi-leg techniques in the same context. They can rapidly compare Credit and Debit spreads to see which approach best reflects their trading philosophy. They can also devise tactics to be used regularly.
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An Iron Condor, which leverages the projected move to sell the move, is an example of a technique that some traders use regularly. It’s placing the stock to stay within a range and not move outside of the projected move at expiration:
The diagram above depicts how the Iron Condor operates. To create a range, it combines an out-of-the-money credit call spread and an out-of-the-money credit put spread.
It takes a $2.64 risk to make $2.36. If the stock is between $507.50 and $565 at expiration, it will receive its full Credit (from both credit spreads).
The risk (or maximum loss) is not equal to the ultimate loss of all Credit Spreads combined. This is because the stock can only go in one direction. So regardless of what happens, one spread will maximize profit.
However, compared to an outright Credit Call or Credit Put Spread, the Iron Condor has a reduced probability of profit. This is because the stock can move in either direction beyond the Credit Spread’s outer strike. If the stock moves beyond either spread, the entire transaction will lose its money because one of the spreads is maxing out.
Traders use iron Condors for various reasons, including selling volatility. Still, in the case of an earnings play, the outcome is frequently binary: either Netflix stays within its predicted move by Friday, or it doesn’t.