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 Bills' 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 Bills 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 the 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 (NFLX)

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

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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.

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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 release. 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 (TSLA)

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 Feb. 16 expiration date than the Jan. 26 date. But here, the Skew and the demand seemingly favor owning puts.

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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.

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

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