Shares of Netflix, Inc. (NASDAQ:NFLX) fell 2.64% on Tuesday following the company’s latest earnings report. The bad news is: Netflix remains rangebound through a multimonth lens. The good news is: A drop in implied volatility has given investors and traders better odds of making in NFLX stock than they’ve had in months.
Netflix earnings for the first quarter came to 40 cents per share, which was 3 cents better than analyst expectations. On the top line, sales of $2.64 billion were right on par with estimates.
However, user growth is a more important metric for a growth company like Netflix. In that vein, some analysts expressed concern over a somewhat softer international user growth number, which has been the focus of many analysts for roughly two years. International additions came to 3.53 million, which was lower than its own guidance for 3.7 million. That didn’t help the blow of weak U.S. additions of 1.42 million streaming subscribers.
Additionally, NFLX said it might be cash flow-negative for years to come as it continues to foray into new movies and shows.
That’s not exactly screamingly positive news. But then again, I don’t think it’s a reason to jump ship, either. Especially considering Netflix provided better-than-expected guidance for Q2 subscriber adds.
NFLX Stock Charts
First, let’s look at the multiyear chart of Netflix, where we can see that its last big jump followed its January earnings report.
This post-earnings reaction led NFLX stock to break out of an 18-month consolidation period, marked with the two black parallels. Ever since that breakout, however, shares largely have done very little (aside from frustrating hyperactive traders in a boring three-month sideways move).
From this angle, it remains to be seen whether Netflix shares will first want to retest the previous area of resistance around $128-$130 before pushing higher. So until we see a break in either direction and out of the recent tight trading range, the stock is better watched than traded with pre-emptive strikes.
On the daily chart, we see that the 50-day simple moving average (yellow) has been a clear area of support for NFLX stock in recent months. And it once again held on a daily closing basis Tuesday.
Note that the intraday selloff was mitigated by day’s end as buyers stepped in and defended the stock. Either that, or sellers simply became exhausted.
Netflix stock clearly remains rangebound, and on the long side, pure stock traders will likely want to wait for a breakout above $147 before committing better capital on the long side.
However, the options market may allow a different opportunity.
At the bottom of the daily chart, note that Netflix’s implied volatility dropped after Tuesday’s earnings report, making directional options bets the cheapest they’ve been since February. So while NFLX stock remains rangebound, options traders could take advantage of the low-priced environment to position for an eventual break higher and out of the range.
June or even August at-the-money call spreads would make sense here. I do think a trade like this would be best done in small sizes until a breakout occurs.
And for downside protection, any break below the trading range would be a last-resort stop-loss.
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