Thursday, May 3, 2012

Aqumin Volatility Newsletter 05/03/2012 - $NFLX, $HRB


Where I was pretty bullish about 6 weeks ago, my ardor for the upside swing has cooled a bit. On balance I think we go higher but the pace will most likely be subdued. For every good ISM report we have a riot in Spain because people can’t stay on the dole forever. I guess our time is coming too but that news still dampens the market in a hurry. It does appear that private capital is back to buying PIIGS debt, so most of what I look at has seen a cooling of the volatilities across the board even if we are not back to the lows in IV. Essentially we have an up and down market where ¾ of the world is growing and Europe is stuck. So I turn my attention to activity that pops up in individual names and to less broad market activity.

Below I have a Wednesday snap of very active names in the S&P 500. The tall dark green spikes are basically names that have dropped quickly (I have the landscape inverted) which I read as HV10 (10 Day and 30 day realized volatility) running over HV30. The short term realized volatility is much faster than the mid-term volatility. I selected NFLX yesterday afternoon (HRB was next to it on the bigger spike but not much interesting trading) and below was day 2 as things opened this morning.

5-3-2012 11-09-03 AM

5-3-2012 11-10-57 AM

Essentially, NFLX was leading the pack in underperformance after earnings, and the downward momentum is keeping the name near the top of the bottom of the heap. When stocks die they tend to die slowly after a poorly received report and NFLX is not an exception. The reality is competition creeping into their business even though I think they have a great delivery system. As May expiration approaches its leading weakness will probably persist. Short out of the money call spreads that are contract neutral (or net long contracts) might do the trick in the May or June cycle. Use any bounce to initiate. Usually when the market loses love the relationship is over for a month or two at least. The funky sentiment is not helping either.

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