Plenty of investors expected Netflix Inc shares to fall after the company reported third-quarter earnings -- but not 35 percent.

After all, the video rental company had been on the slide since July, when it announced a price rise for subscribers who wanted both DVDs by mail and online streaming of television and movies.

Given the uncertainty about the stock, traders in the options market had positioned for the possibility of a 15 percent swing in the shares in either direction.

That would be a fairly big move by most standards, but even that expectation was eclipsed by the share's actual drop to $77.24 by Tuesday afternoon on the Nasdaq from a previous close of $118.84.

Netflix earnings left investors decimated today, said Steve Place, a founder of options analytics firm investingwithoptions.com in Mobile, Alabama.

The options market didn't help either, as the expected move was much lower relative to what actually happened.

The drop in shares came in heavy trading a day after the company warned it would see more cancellations as it grapples with the fallout from a price increase and other unpopular moves, including a failed attempt to split its online and DVD services into two separate companies.

Many traders have been using the popular weekly puts and calls that expire this Friday as a way to gain exposure to short-term moves in Netflix. For example, the weekly $105 strike puts on Monday were the most active option.

Netflix weekly options were pricing about a 15 percent move in the shares up or down into earnings, Place said.

Place said trading of the shares over the past four quarters was a warning to stay away from trading options before earnings. The average one-day earnings move was 10.6 percent over the past four quarters.

The options market attempts to price risk, and it uses past events as well as expected future moves, he said.

But when a stock has completely changed character like Netflix has since the last earnings report, it's very hard to get a feel as to where the stock will trade after earnings. That helps to explain the risk mispricing in the options board, Place said.

Netflix shares fell 9 percent on July 25, a relatively modest earnings move after it reported quarterly revenue that fell short of expectations. It warned that its red-hot subscriber growth would cool in the third quarter.

WINNERS AND LOSERS

There appeared to be big winners and losers in the weekly options in the aftermath of the company's latest earnings.

Any trader that bought weekly puts outright on Monday is sitting on a pile of potential cash.

Put premiums are soaring to the delight of buyers and to the horror of outright sellers, said Interactive Brokers Group options analyst Caitlin Duffy.

In trading of the weekly $85 strike puts on Monday, around 1,000 of those contracts were snapped up for a premium of 53 cents each, she said. These same contracts on Tuesday cost $8.45 each on Tuesday afternoon.

One losing proposition seemed like a pretty safe bet on Monday but appeared to be pretty painful 24 hours later. One investor apparently sold 200 October $75 weekly strike puts to pocket a premium of 15 cents apiece on Monday morning. Those puts cost $2.30 per contract during Tuesday's session.

But the trader may walk away unscathed with premium in hand as long as the shares exceed $75 by Friday, Duffy said.

Software Netflix