Perennial FANG whipping boy, Netflix, Inc. (NFLX) stock has been beaten up so far in 2016.
After rallying more than 140% in 2015, Netflix stock has shed over 11% so far this year. Compared to other FANG stocks — Facebook Inc (FB), Amazon.com, Inc. (AMZN), Netflix and Alphabet Inc (GOOG, GOOGL) — NFLX has attracted an unusually high degree of bearish sentiment. Unwarranted or not over the long-term, this negativity has created a short-term opportunity for savvy options traders.
At the center of the bearish movement on Netflix stock, brokerage firms have long worried about the company’s ability to maintain growth amid the rising cost of acquiring new content.
Checking in with Thomson/First Call, we find that 21 of the 44 analysts following Netflix stock rate the shares a “hold” or worse.
Still, the 12-month consensus price target rests at $130 per share, hinting that the brokerage community is pricing in a 28% rise in NFLX stock over the next year.
The real meat of the pessimism levied against Netflix stock comes from the short-selling community, however. As of the most recent reporting period, roughly 55 million NFLX shares were sold short, accounting for more than 13% of Netflix stock’s total float. With NFLX recently recovering the $100 mark, these short sellers may come under pressure, creating additional upside potential for the shares.
Turning to the options pits, it would appear that short sellers are not worried about an extended rally at all. Currently, the March put/call open interest ratio for Netflix stock rests at 1.08, with puts outnumbering calls among short-term options. Since short sellers utilize calls as a hedge against potential upside in the underlying stock, the lack of heavy call OI is a sign that these bearish traders believe that Netflix stock’s recent rally will be short lived.
Overall, March implieds are pricing in a potential move of about 6.4% for NFLX. This places the upper bound at $108, while the lower bound lies at $95. Netflix stock is currently hovering near the $100 mark, with technical resistance at $107 and support at $90. A breakout above $105 could lead the shares considerably higher than $107, while a floor at $90 should remain intact over the short-term.
2 Trades for NFLX Stock
Call Spread: Those traders looking to bet on an extended rally for Netflix stock might want to look at a March $101/$105 bull call spread. At last check, this spread was offered at $1.85, or $185 per pair of contracts. Breakeven lies at $102.85, while a maximum profit of $3.15, or $315 per contract, is possible if Netflix stock closes at or above $105 when March options expire.
Put Sell: More cautious traders might want to consider a put sell strategy on Netflix stock as a way to take advantage of technical support. At last check, the March $90 put was bid at 47 cents, or $47 per contract. As long as NFLX trades above $90 through March expiration, traders who open this position will keep the initial premium received. However, if NFLX trades below $90 when March options expire, you may be assigned 100 shares of Netflix stock for each contract sold at a cost of $90 each.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
