Netflix, Inc. (NFLX) has a lot going on this week. Bright and early tomorrow morning, NFLX stock will undergo the 7-for-1 stock split that the company’s board approved back in May. And just when traders have begun to sort their situations out, Netflix will release its second-quarter earnings report after the close of trading.
All in all, it will be a very busy and potentially volatile end to the week for NFLX stock, and options traders stand to make some sizeable profits.
Focusing on Netflix’s earnings report, Wall Street is projecting a post-split profit of 31 cents per share, which is actually up sharply from last year’s pre-split earnings of $1.15 per share. Revenue is expected to rise 23% year-over-year to $1.65 billion.
That said, expectations may be even higher, with EarningsWhisper.com reporting a second-quarter whisper number of 37 cents per share for Netflix. Historically, Netflix has bested Wall Street’s targets in every quarter for the past four years, so maybe the whispers are on to something.
Digging deeper into the brokerage community’s expectations for Netflix, we find that the stock has attracted 26 “buy” ratings, compared to 13 “holds” and three “sells,” according to data from Thomson/First Call. While there is a little wiggle room for potential post-earnings upgrades, there is plenty of room for price target increases, as the consensus 12-month target of $700 represents a discount to Netflix’s Monday close.
Morgan Stanley and Goldman Sachs have already gotten the ball rolling on that front, with Morgan boosting Netflix to $750 from $620 on Friday, and Goldman boosting the stock to $780 from $620 yesterday. Should more follow suit, it could bode well for NFLX stock.
Short interest is also a potential bullish driver for NFLX. As of the most recent reporting period, 4.2 million NFLX shares were sold short, accounting for 7% of the stock’s total float. In other words, there is ample fuel for a potential covering rally in the wake of the stock split and earnings report.
If there is any trepidation among these short sellers, it isn’t showing up in NFLX’s options pits. The stock’s July/August put/call open interest ratio currently rests at 0.98, with puts and calls in near parity. Typically, if short sellers were hedging their bets, you would expect to see more call open interest. The lack of heavy call open interest would suggest complacency among short sellers, which could come back to haunt them.
Click to Enlarge Overall, July options are pricing in a potential post-earnings move of about 9% for NFLX stock. This places the upper bound at $772, while the lower bound lies at $643. Keep in mind that NFLX options strikes are still showing pre-split levels.
Don’t worry, though, they will automatically adjust tomorrow morning — i.e., other than arbitrage and similar option plays, there is no need to look at the NFLX 100 strikes until tomorrow.
2 Trades for NFLX Stock
Call Spread: NFLX stock already has an upside bias heading into the company’s quarterly earnings report due to strong year-over-year growth numbers. Add to this the fact that NFLX stock will become significantly more affordable for a lot of traders tomorrow, and we have the makings of a potentially significant rally. Traders looking to get in on the action might want to consider an Aug $710/$750 bull call spread.
At the close of trading on Monday, this spread was asked at $14.02, or $1,402 per pair of contracts. Breakeven lies at $724.02, while a maximum profit of $25.98, or $2,598 per contract, is possible if NFLX closes at or above $750 when August options expire.
Put Sell: Alternately, if the capital outlay for a call spread is a bit too high for your tastes, you might want to consider a put sell strategy on NFLX. At the close of trading on Monday, the July 630 put was bid at $5.70, or $570 per contract. As long as NFLX trades above $570 through July option expiration this Friday, traders who open this position will keep the initial premium received. However, if NFLX trades below $570 before Friday’s close, you may be assigned 100 shares of NFLX stock for each contract sold at a cost of $570 each.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
