Netflix (NFLX) is set to release its first-quarter earnings report after the close on Monday, April 21, and if options activity on NFLX stock is any indication, investors could be in for quite a ride.
Implied volatility for NFLX weekly April 26 options is currently pricing in a potential post-earnings move of more than 12%.
In other words, options traders expect that NFLX stock could fall as low as $290 or spike as high as $369 in the wake of Netflix earnings.
Overall, it appears that these speculative investors are anticipating a rally in Netflix stock. In fact, call open interest for the April/May series of NFLX options totals 36,351 contracts, compared to put open interest of 22,480 contracts. The result is a bullishly slanted put/call open interest ratio of 0.62 for the front two months of NFLX options.
That said, some of this call activity on NFLX stock could be the work of short sellers hedging their positions. Currently, some 3.9 million Netflix shares are sold short, accounting for a sizable 6.67% of the stock’s total float, or shares available for public trading. If these short sellers are nervous that NFLX stock will rally following next week’s earnings report, they might buy out-of-the-money calls to hedge their positions against losses.
Either way, a big enough jump from NFLX stock could still force some of these shorts to limit losses by buying back their positions, which could add fuel to a post-earnings rally.
Turning to Wall Street, the brokerage community has expressed a lack of confidence in NFLX stock. According to data from Thomson/First Call, analysts have doled out 28 “hold” or worse ratings, compared to just 10 “buy” ratings. What’s more, the 12-month price target for NFLX stock rests at $375, a mere 13% premium to yesterday’s close.
Technically speaking, Netflix stock has been pounded for several weeks now. During the past year-and-a-half, NFLX has been a leader among the tech sector’s momentum stocks. But that momentum bubble appears to have popped, placing Netflix shares down roughly 27% from their mid-March peak.
Click to Enlarge Still, NFLX stock has technical support in its 52-week moving average and the round-number $300 level. Furthermore, shares are trading heavily in oversold territory, hinting that a rebound might be in the cards heading into next week’s earnings report.
Speaking of next week’s Netflix earnings, the consensus is forecasting a profit of 83 cents per share. According to data from Zacks.com, Netflix has easily topped these earnings estimates in every quarter for the past three years.
As a result, some analysts have set their sights higher, with EarningsWhisper.com reporting that Netflix’s first-quarter whisper number arrives 6 cents higher.
2 Options Trades on NFLX Stock
For those looking for an options trade on NFLX stock ahead of earnings, there are two potential paths to pursue.
May $330/$370 bull call spread: The first is a contrarian play, designed to take advantage of Netflix’s strength, oversold condition and an unwinding of bearish sentiment on the shares. Traders going this route might want to consider a May $330/$370 bull call spread. At last check, this spread was offered at $16.05, or $1,605 per pair of contracts. Breakeven rests at $346.05, while a maximum profit of $23.95 is possible if NFLX stock closes at or above $370 when May options expire.
May $250 put sell: Alternately, if Netflix’s short-term outlook concerns you, a May $250 put sell has a high probability of finishing out of the money. As of the close last night, this option was bid at $2.65, or $265 per contract. As usual with a put sell, you keep the premium as long as NFLX stock closes above $250 when May options expire. On the downside, if NFLX trades below $250 prior to May options expiration, you could be assigned 100 shares for each put sold at a cost of $250 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.