Mondays are always a bit of a drag, but they are doubly so following a long holiday weekend filled with family get-togethers, lots of food and, of course, Easter candy.
It probably doesn’t help that I spent much of last night planted in front of my big-screen binge-watching season four of House of Cards and season two of Daredevil on Netflix, Inc. (NFLX). It was a nice respite from all the political turmoil I’ve read about in the news and on Wall Street the past couple of weeks, though.
The funny thing about turmoil, however, is that volatility follows almost in lockstep. And volatility is the lifeblood of options trading.
Take Netflix stock, for instance. NFLX is one of many stocks that is currently in the middle of a correction, one sparked by the terror attacks in Brussels but well fed by an overbought stock market following a five-week rally.
The recent volatility in Netflix stock price has given rise to higher put option premiums and lower call option premiums — a direct effect of shifting volatility on the shares.
Netflix Stock Chart
For Netflix stock, this correction comes at an inopportune time. The shares had just reclaimed the $100 mark and were on the verge of breaking out above their March 4 peak near $102.50. NFLX has since given up $100 as well as its 10-day moving average.
As usual, sentiment does not favor Netflix stock. For instance, 21 of the 45 analysts following Netflix stock rate the shares a hold or worse, according to data from Thomson/First Call. The 12-month consensus price target of $124.95 is a bit more reasonable, representing a 27% premium to the March 28 close, though there is still room for improvement here.
Bearish sentiment really begins to pile up when we take a look at short selling activity on Netflix stock. As of the most recent reporting period, some 53 million NFLX shares were sold short, up from 46 million in December. This raft of short positions now represents about 14% of the stock’s total float.
Turning to Netflix stock options, puts continue to be quite popular. Currently, the April/May put/call open interest ratio for NFLX rests at 0.83, with calls only just outnumbering puts among short-term options. This ratio rises to 0.93 when looking just at April options, hinting that options traders are concerned about the stock’s short-term health.
Looking at implieds, April options are pricing in a potential move of about 7.7% ahead of April expiration. This places the upper bound at $105.93, while the lower bound lies at $90.79.
2 Trades for NFLX Stock
Put Spread: With weakness growing in the market and the likelihood of a correction extending into next week, selling pressure may remain heavy on Netflix stock. Implieds may have risen on NFLX puts, but an April $96.50/$98.50 bear put spread may still be the best option for profiting from the retreat.
At last check, this put spread was offered at 82 cents, or $82 per pair of contracts. Breakeven lies at $97.68, while a maximum profit of $1.18, or $118 per pair of contracts, is possible if the Netflix stock price closes at or below $96.50 when April options expire.
Put Sell: If you’re not sold on the extent of the potential decline for Netflix stock, but you still don’t see the shares rebounding quickly, you want to consider a put sell strategy on NFLX as a way to take advantage of higher put premiums and technical support.
At last check, the April $90 put was bid at $1.10, or $110 per contract. As long as Netflix stock trades above $90 through April expiration, traders who open this position will keep the initial premium received. However, if NFLX trades below $90 before expiration close, you may be assigned 100 shares of NFLX stock for each contract sold at a cost of $90 each.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
