Bears sank their teeth into FANG-member Netflix, Inc. (NFLX) last week and for good reason. But in our estimation, the bloodbath in Netflix stock may have only just begun.
But let’s be frank, Netflix earnings weren’t completely devoid of good news. In fact, the streaming content provider topped earnings estimates by 50% with a profit of 6 cents per share.
Sales did fall short, but only by the narrowest of margins. Posted revenue of $1.96 billion compared to estimates of $1.97 billion.
But investors did indeed get a good spook from the company, and NFLX reacted with a drop in excess of 13% in the immediate aftermath.
The scare for investors came from an increasingly important international market.
Weak international guidance and subscriber numbers failed to deliver the type of growth necessary for Netflix to justify its rich valuation, as its domestic business matures and competition and cost to do business intensify.
NFLX Stock Daily Chart
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Prevailing and increasingly aggressive bullish market sentiment ultimately got the best of our discussed resistance zone, as well as the managed bear put spread.
Shares grinded higher over the next month and eventually broke into bull territory above the 200-day simple moving average just in front of Netflix’s earnings report.
Having said that and looking forward, the story for Netflix stock has quickly become much more bearish on the heels of the company’s earnings fallout.
Following its massive selloff, NFLX shares have consolidated tightly near recent lows. The positioning puts it below layers of technical resistance, beginning with the 50-day simple moving average. Now it’s likely investors are having trouble continuing to support Netflix’s bullish storyline.
Given NFLX appears to be a broken growth stock at this point, the early February lows near $80 a share are a reasonable initial target.
Netflix Stock Options
Reviewing the options board, and given our expectations, the July $90/$85 bear put spread for $1.50 is attractive.
The out-of-the-money vertical requires shares of NFLX to eventually trade below $85 at expiration to realize the full max payout of $3.50 and return of 233%.
At the same time, this spread is roughly 65% cheaper than an outright $90 put. Also nice, the vertical is much slower to lose its value because of its construction and reduction of Greek risks.
In the interim and bottom-line, should Netflix stock begin to further weaken in the near future, profits can begin to accrue and adjustments to further reduce risk can be entertained.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
