The earnings parade rolls on next week, and online media services firm Netflix, Inc. (NFLX) is set to join the ranks after the close on Tuesday.
The company is fresh off a strong performance at the Golden Globes, with Kevin Spacey taking home the award for Best Actor in a TV Series for the Netflix original House of Cards. While the press for the win is gravy for Netflix, the company needs to put up a strong performance of its own next week to reassure investors.
NFLX stock has been struggling lately. The shares were hit hard following last quarter’s earnings release, which saw earnings and revenue arrive in line with expectations while subscriber adds fell short of guidance.
The stock has yet to recover from the blow, with NFLX stock down nearly 30% since mid-October.
Technically, NFLX stock is hovering just above technical support in the $300 region, while battling declining resistance at its 50-day moving average.
Support appears to be holding firm, despite NFLX trading near in oversold territory, offering up a positive sign for traders heading into next week’s report.
Click to EnlargeSpeaking of earnings reports, Wall Street is expecting a profit of 44 cents per share out of Netflix. The company has topped these expectations in every quarter for the past four years, making their release somewhat of a minor formality at this point as most investors are looking at Netflix’s growth, guidance, and subscriber numbers at this point.
EarningsWhisper.com reports a whisper number of 46 cents per share.
Turning to the options pits, we find that NFLX stock could be in for a significant post-earnings move. Specifically, implied volatility for NFLX weekly Jan 23 options is currently pricing in a move of more than 11%.
In other words, options traders expect that NFLX stock could fall as low as $286 or spike as high as $358 by the end of next week.
Taking a closer look, it appears that options traders are anticipating a rally for NFLX stock. In fact, January/February put/call open interest ratio of 1.11 arrives less than 10% away from an annual low for NFLX stock.
Put in layman’s terms, short-term options traders have rarely held more call relative to puts at any point during the past year.
That said, some of this call activity on NFLX stock could be the work of short sellers hedging their positions. Despite a 15% decline in short interest during the most recent reporting period, some 5 million shares of NFLX stock remain sold short, representing a hefty 8.6% of NFLX’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 in order 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.
With the shares trading near oversold levels just above technical support, and the potential for additional short covering, the path of least resistance for NFLX stock appears to be upward. As such, those looking for an options trade on NFLX stock ahead of earnings might want to consider the following:
2 Trades for NFLX Stock
Call Spread: With a potential move of more than 11% on tap, a NFLX Feb $320/$340 bull call spread has a good chance of hitting its maximum profit potential. At the close of trading on Thursday, this spread was offered at $8.05, or $805 per pair of contracts. Breakeven rests at $328.05, while a maximum profit of $11.95, or $1,195 per pair of contracts, is possible if NFLX stock closes at or above $340 when February options expire.
Put Sell: Alternately, if NFLX stock’s short-term outlook concerns you, a weekly Jan 23 put sell at the $270 strike has a high probability of finishing out of the money. As of the close last night, the weekly Jan $270 put was bid at $2.01, or $201 per contract. As usual with a put sell, you keep the premium as long as NFLX stock closes above $270 when weekly Jan 23 options expire, which is the end of next week. On the downside, if NFLX trades below $270 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $270 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
