This quarter, Netflix (NFLX) is estimated to earn $.46 EPS and $1.5 Billion in revenue vs $.79 EPS last January on revenue of $1.2 Billion. I think this quarter is one of the most important quarters in recent history. NFLX’s growth story is starting to be questioned. For the first time in many years, analysts are estimating negative EPS growth. This means that when the subscriber figures that NFLX reports are going to be very important. If the subscriber figures underwhelm the street’s estimates, it will cause many people in the stock to start to panic. Last quarter, NFLX moved 25% following the report. I believe that NFLX has the potential to move the same for fundamental and technical reasons.

Fundamental Reasons:

If NFLX reports weak EPS and weak subscriber growth numbers expect the stock to tumble. Because, if NFLX has two consecutive quarters of earnings misses I think investors will sell the stock hand over fist. With the recent market pullback, and the overall bearish sentiment in the high-beta names I think that a miss will cause the name to fall back towards $250-$275. If NFLX reports strong earnings, I expect investors to jump back into the name, as they realize that the growth story is still intact. There is a gap at $425 which I think can be tested, if the numbers come in much stronger than expected.

Technical Reasons:

As seen on the chart, the Bollinger Bands are very tight, which indicates the potential for a big move. In addition, NFLX has not moved that much since its last report. So I think that it will either break down to the mid 200s or breakout to the low 400s. Every earnings play is a ‘lotto’ trade (which means it is a total guess). However, I think the risk/reward is favorable for being long calls and puts (strangle).

For these reasons, I favor playing a strangle for earnings. Specifically, I want to buy he 280/395 strangle for $4.  I think NFLX could have a 20% move, and if it does then the profit on this trade will be 300%+.

Trade P/L

Current NFLX Price: $337

Downside target (20%): $270       

Aggressive Downside Target (25%): $255

Profitability for 20% move: 280 puts cost $2. If NFLX were to touch $270, then the 280 puts would make 400%. If NFLX were to touch $255, the 280 puts would make over 1200%.

Upside Target (20%): $405

Aggressive upside target (25%): $420

Profitability for 20% move: 395 calls cost $2. If NFLX were to touch $404, then the 395 calls would make over 400%. If NFLX were to touch $430, the 395 calls would make over 1200%.