It’s that time again. Time to place your bets on a short-term Netflix, Inc. (NFLX) rally. Or is it? The stock has shown no inclination of revisiting $100 anytime soon, and key trendlines are breaking down and issuing bearish short-term signals.
Earnings could be a catalyst for a rally, but Netflix’s report is more than a month away. Add in the potential Brexit fallout, and things aren’t shaping up all that well for NFLX stock over the next couple of weeks.
First, the technical picture: Since the start of 2016, Netflix stock has settled into a pattern of lower highs and lower lows. Most recently, the stock peaked at $110, pulled back to the $86 region and bounced to $100.
Following this pattern, the recent pullback to support near $92.50 may only be a temporary stop for NFLX stock. The next potential floor ahead of earnings could be closer to $86, if not lower, should the Brexit tank Wall Street.
Checking in on Netflix’s sentiment backdrop, we find growing skepticism that could push NFLX shares lower in the short term. According to Thomson/First Call, 20 of the 44 analysts following Netflix rate the shares a “hold” or worse. With 24 buys still on the docket, there is ample room for the situation to grow worse before it gets better, and NFLX has given bulls little reason to remain.
The situation is already growing worse on the options front. In fact, NFLX stock’s July put/call open interest ratio has ballooned to a reading of 1.01 after rising steadily over the past month. This rising preference for short-term puts hints that options traders are expecting Netflix stock to trend lower through July expiration on the 15th of next month.
Click to Enlarge Finally, short-sellers are also raising the stakes on NFLX’s decline. In the most recent reporting period, the number of Netflix shares sold short rose by 4% to 39 million.
The result is that 9.27% of the stock’s total float, or shares available for public trading, are now sold short. A continuation of this trend could provide additional selling pressure for NFLX stock.
Overall, July 15 series implieds are pricing in a potential move of about 9.24% in the next month, placing the upper bound at $103.78 and the lower bound at $86.22.
2 Trades for NFLX Stock
Put Spread: Normally I would be inclined to bet against such a bearish sentiment backdrop as a contrarian play, but NFLX stock has given me very little reason to believe that the shares will rebound without a driver, such as next month’s earnings report. Traders looking to side with the bears over the short-term might want to consider a July $90/$95 bear put spread. At last check, this spread was offered at $1.83, or $183 per pair of contracts. Breakeven lies at $93.17, while a maximum profit of $3.17, or $317 per pair of contracts, is possible if NFLX closes at or below $90 when July options expire.
Strangle: On the other hand, a broad-market relief rally following the Brexit vote could lift NFLX sharply higher, thus breaking the stock’s year-to-date trend. Furthermore, there is plenty of volatility in NFLX stock right now, creating potential for a strangle play. A strangle involves the simultaneous purchase of a near-the-money call and a near-the-money put, and allows the trader to take advantage of a large move in the underlying stock regardless of the direction.
At last check, the NFLX July 15 series $90/$95 strangle was offered at $12.05, or $1,205 per pair of contracts. Breakeven for this trade lies at $107.05 on the upside and at $77.95 on the downside. The upside target is achievable following a positive Brexit outcome, while the lower target would fall in line with Netflix’s technical pattern of lower highs and lower lows so far in 2016.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
