Netflix stock price continues to increase, but volatility has increased as well. Cashing out 2022 options is now a question of how aggressive you want to be with nine years still on the clock.
NFLX 5-1-22 to 7-16-23
This is not financial advice for you. There is no way I can understand your personal situation; your specific risk tolerance, ambitions, concerns, etc. for this to be specific advice for anyone. This is just math that hopefully gives you an analytical framework to help you make the right decision for yourself.
Back in February, when NFLX was just getting over $360, I pointed on that for options purchased in 2022, the future time value of those options was great enough to consider holding on to this options instead of cashing out. Depending on whether we look at the leverage or the Insight Ratio, NFLX has recently surpassed the price at which it could make sense to sell.
With the July trading window opening soon, this is just an update on the math to save you a little time.
If we are just waiting until the leverage drops below 40%, the math is the same. For the options dated July 1, 2022 with an exercise price of $179.95, if the price is above $449.88 when the trading window opens, you have a solid justification for selling.
But when we use the Insight Ratio® as our analytical tool, we can’t rely on the conclusions from February. In addition to the stock price changing, the time remaining has changed (barely), but the biggest impact comes from the change in volatility. In February, I used a volatility assumption of 37%. Looking at the same methodology, I would now use a volatility assumption of 48%. This is to be expected when the stock price goes up so much so fast. Volatility measures how much a stock goes up and down, not just down.
This table is the current Leverage and Insight Ratio® based on the $441.91 closing price on 7/14/23, using a 3% risk-free rate and volatility of 48%.
NFLX closing price on 7-14-23, Black-Scholes value, using 3% risk-free rate and 48% volatility.
This table will show you the stock price at which you could sell certain options from 2022 based on leverage and Insight Ratio. And to compare to February, I’ll include an analysis using a 37% volatility assumption as well.
Potential sales prices of four lots from 2022 based on Leverage and Insight Ratio®
Reminders:
NFLX has increased 50% since the beginning of the year. This has also led to an increase in the volatility of NFLX stock. In the Black-Scholes calculator and the Insight Ratio®, this increased volatility assumption makes the future Time Value of the option more valuable than when we looked at these options in February.
You can choose to be more conservative about the future. If you assume a lower future volatility (very acceptable assumption), then the price you should sell is even lower.
This is why I present the Leverage calculation along with the Insight Ratio®. The Leverage is not dependent on assumptions [guesses] about the future and will not change over time.
If you need or want the money for anything in particular, it is always ok to cash out. There will always be a realistic risk that the stock price drops dramatically in the next few months/years. This math continues to look at a nine year time frame. Are you still comfortable planning on that scale?
Back in February, when I recommended holding on to the options, I was not trying to predict the future. I am never going to predict whether the stock price goes up or down. The Netflix Supplemental Stock Option Plan continues to be the highest risk employee benefit I have ever seen. My hope is that by using these tools, you can comprehend how much time remains for the possibility of capturing greater upside.
If you have any questions, please feel free to email me at aaron.agte@graystoneadvisor.com or schedule a meeting.
Aaron Agte, CFP®, founder of Graystone Advisor, is a fee-only Financial Planner located in Foster City, CA, serving clients virtually in the Bay Area and across the country. He specializes in helping families with stock options, RSUs, and other equity compensation.
@AaronAgteCFP