It’s been a difficult year for Netflix, Inc. (NASDAQ:NFLX) bulls. But for NFLX stock traders tuning into a bearish channel on the price chart, it’s prime time for a well-placed and well-priced modified options spread.
Let me explain.
After an enviable and hefty gain of about 125% in 2015, NFLX is off roughly 12%, compared to newly minted highs and a year-to-date gain approaching 5% for the S&P 500.
But it’s hard to pity Netflix bulls. Remember or know this — last year’s strong performance doesn’t even address the meteoric, near 600% NFLX stock racked up over two years from its low in late 2012 through 2014!
The irony for Netflix is after years of losing money, two profitable earnings beats in 2016 have been no match for investors heading to the exits and short interest nearing 9%.
Could investors finally be waking up to the many and growing challenges still facing shares of NFLX?
In our mind, the answer is “yes.”
With a saturated and mature U.S. market, growing competition, rising costs and challenging conditions internationally — which thus far hasn’t taken up the slack in decelerating U.S. growth to justify Netflix’s hefty multiple — there’s less reason to believe the NFLX fairy tale has a sequel for bullish investors.
Another drag for NFLX investors is the analyst community. In the past week there’s been three downgrades punctuated by a “sell” rating and $45 price target in NFLX stock from Wedbush.
As Wall Street typically avoids such bearish overtures like the plague, our view is there’s even more reason to think Netflix’s best days are behind it.
NFLX Stock Daily Chart
Looking at Netflix shares from another angle, the discussed warning signs also have the technical backing of a rather big and ugly picture on the NFLX stock chart.
Since hitting an all-time-high in late 2015, NFLX has established a lower low relative to last summer’s flash-crash low. That’s considered bearish, and that’s not all.
More recent, overall weakness in NFLX stock has produced a bearish down-channel which began in front of Netflix’s April earnings report. Obviously, “better-than-expected” results are not the end all, say all when dealing with an expensive stock and high investor expectations such as we see in Netflix.
With Netflix’s next earnings report due out next week, a bearish catalyst is certainly present. Based on the overall evidence, NFLX stock could soon be challenging 2016’s low near $80, as the path of least resistance is down on multiple counts.
Netflix Bearish Put Butterfly Spread
Reviewing Netflix stock’s options board and given our expectations, a modified and bearish August $95/$85/$80 put butterfly for $2.50 is attractive.
This long put spread is constructed to maximize its profit of $7.50 or 300% at $85. As a softer delta spread and one targeted above our discussed $80 target for NFLX; overall this is a more conservative, limited risk way to play Netflix bearishly.
The better news, unlike a regular butterfly, this modified spread won’t lose money if NFLX stock overshoots the purchased $80 strike put. This is because the two embedded verticals are different widths and the $95/$85 bearish put spread maintains an additional $5 in profit potential over the bullish $85/$80 put spread.
Bottom line, at $80 or below, the trader captures $10 profit from the bear vertical and loses $5 on the bull put spread. That’s a gross of $5 profit. And with the cost of admission for this potential horror show costing $2.50, this trader nets $2.50 in profit if a seriously bearish sequel unfolds.
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.
