Shares of Netflix, Inc. (NASDAQ:NFLX) have put together a nicely packaged move of late. But the bad news? If I’m right, NFLX stock is facing another episode of horror for bulls — set to air this Monday night.
Netflix earnings for the second quarter will be released after the close this coming Monday, July 17. And in front of one of the market’s more consistently entertaining corporate confessionals (if we use price volatility as our gauge), Morgan Stanley decided to step up to the mound and throw its best pitch at investors.
Analyst Benjamin Swinburne offered an “Overweight” reiteration while raising his price target from $175 to $185. The PT lift compares to a median forecast of $170 and implies upside of 17% from Thursday’s close of $158.21.
The price hike for NFLX stock is based on the firm’s view the market isn’t right. Said another way, it “isn’t fully appreciating Netflix’s potential for materially higher earnings power.”
Thursday was apparently no different. Investors more or less tuned out Morgan Stanley’s latest pitch, and Netflix fell marginally on a day the Nasdaq Composite did the same.
Investors’ collective dismissal isn’t surprising. If they’re tuned into a trading screen, my guess is one guy’s “flat base” of six weeks has more viewers subscribing to a bearish outlook.
Netflix’s Chart
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That’s not to say I was altogether bearish. I noted if shares eventually reeled lower into the $133-$140 price zone; the deeper corrective action and testing would have our interest as potential buyers.
It turns out the moving average failed, but shortly thereafter the flag pattern did reverse. NFLX stock then went on to hit new relative lows, though not so severe as to make my initial forecast look privy to inside information.
Currently, I can’t help but notice the rhyming-like symmetry of a second flag. Once again, the blue-coated institutional moving average has failed to act as resistance for bearish decisions in NFLX. AAlso, a doji candlestick has formed into resistance associated with the June 8 algo-driven micro flash crash.
How to Trade NFLX Stock Before Earnings
With Netflix’s second-quarter report due out Monday evening, the risk of a substantial gap and/or heightened price volatility is obviously elevated.
Combined with our view of downside risk in the near-term, but liking the idea of buying Netflix shares on weakness, I like the idea of a short-term modified put butterfly.
The Jul $150/$145/$135 put butterfly combination is priced for a small 5-cent credit with shares at $158.20.
What’s this variation on a long put butterfly offer?
For starters, if Netflix stock isn’t below $150 next Friday, you keep the credit. If you’re bullish at current prices, this isn’t a great strategy, as the 5-cent profit will feel like you’re being short-changed in a rally.
Alternatively, a near-term bearish move in NFLX could produce profits approaching $5.00 per spread at $145 on expiration. The potential profit aligns itself nicely with our outlook of lower prices preceding any rallies.
The breakeven on this butterfly is $139.95. This also fits in well with our view of where shares would have to trade to consider a purchase.
Lastly, there is risk of nearly $4.95 below $135, but the loss is 100% contained. What’s more, in the event that Netflix earnings turn downright scary, you won’t face the horror of unimaginable margin calls. And realistically, you’d be in better position to pick up NFLX stock at levels associated with blood-in-the-streets theatrics.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
