I said yesterday before the market closed to be aware of Netflix (NFLX, $39.32, up $0.76) going into earnings. I mentioned the stock could fall victim to the classic “buy the rumor, sell the news” event and that is what appears to be transpiring. Despite reporting the company’s biggest increase in subscribers for a quarter (764,000 to 8.24 million total) the stock was down 14%, or $5.50, to $33.82 in after-hours trading last night.

Netflix reported earnings of $13.4 million, or $0.21 cents a share, on revenues of $326 million. That was the first problem. Although the company matched estimates many analysts were figuring in a higher number that would exceed expectations. Secondly, Netflix said it anticipates only 60,000 to 260,000 more customers will sign up during the current quarter and they trimmed a penny off the upper end of its full-year guidance. Certainly not a catastrophe, but its something that was viewed as a negative.

The May 40 calls (QNQEH, $2.85, up $0.51) opened at $2.20 and traded as high as $3.30 when the stock reached $40.63. Nimble traders that were able to get in-and-out did well. Otherwise, if you held the calls overnight you will be feeling the pain when the market opens this morning. Here again is another example of buying options ahead of a company’s earnings announcement. Sure, there is money to be made trading options around situations like this but often times it can lead to disaster if you’re not careful.

Rick Rouse
Rick@OptionsMentoring.com