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NFLX Earnings: 2 Trades For Betting Against the Grain


Online movie streaming firm Netflix Inc. (NASDAQ:NFLX) is set to stride into the earnings confessional after the close of trading tomorrow, and the financial media is blaring bullish sentiment ahead of the event.

NFLX Earnings: 2 Trades For Betting Against the GrainNFLX stock has soared more than 12% since Thursday as a result, but a deeper look at Netflix sentiment backdrop reveals that there is plenty more fuel for the fire — if the company doesn’t skimp on guidance.

During the past several days, the brokerage bunch has been buzzing with bullish activity for Netflix:

  • On Thursday, BMO Capital lifted its price target on NFLX from $370 to $565.
  • On Friday, Citigroup upgraded NFLX stock to “buy” from “neutral” and boosted its price target from $409 to $525.
  • And yesterday, UBS upgraded the shares to “buy”from “neutral” while raising its price target from $400 to $450.

Despite the widespread coverage of these upgrades, opinions on NFLX’s outlook are still very much divided within the analyst community. Specifically, Thomson/First Call data reveals that brokerage firms have doled out 22 “buys,” 19 “holds,” and three outright “sell” ratings on NFLX stock. Furthermore, the 12-month price target for the shares rests at $481.50 — a premium of only 1.4% to Monday’s close.

From a contrarian perspective, the holdouts among the brokerage community represent potential buying power due to upgrades and price-target increases if Netflix is able to continue its strong quarterly showing and offer up equally strong guidance.

Speaking of earnings expectations, Wall Street is currently expecting a profit of 69 cents per share from Netflix, down 26.5% from year-ago results. Revenue, meanwhile, is expected to jump 24% year-over-year to nearly $1.6 billion.

The disconnect between these two figures has long been a sore spot for analysts and investors, as Netflix weighs the rising costs of content acquisition and creation. Any narrowing in this gap could be just the spark to unravel penned up bearish sentiment.

Speaking of bearish sentiment, while the number of NFLX shares sold short declined by 7% during the most recent reporting period, there are still 4.9 million shares of NFLX stock sold short. This accumulation of shorted shares represents 8.4% of the stock’s total float, or shares available for public trading. In other words, there is still fuel for a potential short squeeze situation.

Negativity is also thick in the options pits. For example, the April/May put/call open interest ratio for NFLX comes in just shy of parity at 0.98. Furthermore, the April series, which should either have more calls due to short sellers hedging their bets or due to a positive bias ahead of earnings, sports a put/call open interest ratio of 1.02, with puts just edging out calls in terms of popularity.

04-14-2015 NFLX
Click to Enlarge
 Overall, April option implieds are pricing in a potential post-earnings move of about 9.25% of NFLX. This places the upper bound at $518.95, while the lower bound lies at $431.05. A rally puts NFLX north of the $500 mark for the first time, while a decline could send the shares down for a test of their 10- and 20-day moving averages.

2 Trades for NFLX Stock

Call Spread: With NFLX stock up 12% during the past three days, many on Wall Street are betting that the shares have spent their buying power. The shares are even edging close to overbought territory on a technical level. As I have noted extensively above, however, there is still a wealth of untapped sideline money that could be brought to bear on NFLX, if the company only offers up a solid quarterly report and positive guidance.

As such, I’m inclined to take a contrarian stance on NFLX and bet bullishly ahead of tomorrow’s quarterly report. Those traders looking to take a chance on a bullish play might want to consider a May $480/$510 bull call spread. At last check, this spread was offered at $11.32, or $1,132 per pair of contracts. Breakeven lies at $491.32, while a maximum profit of $18.68, or $1,868 per pair of contracts, is possible if NFLX closes at or above $510 when May options expire.

Put Spread:  Alternately, if you’re not comfortable with a bullish NFLX trade, you could look into a put sell position. For instance, an April $400 put sell stands a good chance of finishing out of the money when these options expires at the end of this week.

At last check, this option was bid at $1.45, or $145 per contract. On the upside, you keep this premium as long as NFLX stock closes above $400 when April options expire. On the downside, should NFLX trade below $400 ahead of expiration, you could be assigned 100 shares for each put sold at a cost of $400 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/nflx-earnings-2-trades-for-betting-against-the-grain/.

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