Netflix, Inc.: NFLX Stock Is Down, Not Out

Advertisement

Shares of Netflix, Inc. (NFLX) were trounced on Tuesday following an earnings report that saw profits beat and revenues miss, but most importantly, saw subscriber growth fall well short of analyst hopes, especially from the international side.

NFLX stock fell nearly 13% on the day, dropping from $108.40 to $94.34 — bad news for anyone already holding the stock, but good for traders. That’s because Netflix has set up a short-term opportunity to play a bounceback.

NFLX SIWhile valuation concerns always surround a growth stock like Netflix, one thing we can’t deny is that NFLX stock certainly is cheaper after a 13% drop. Meanwhile, competition concerns from Amazon.com, Inc. (AMZN) via the Amazon Prime platform are overblown, especially given the dramatic quality and quantity edge of Netflix.

The coming price increase to $9.99 for existing customers will hardly spark a mass exodus (does two bucks really get you to contemplate a change?), but instead be a boon to Netflix margins. This translates to $34 million a month, or nearly $400 million a year, to Netflix’s bottom line.
NFLX stock has a fair amount of short interest, with days to cover increasing lately. A bounce off support could fuel a sharp short covering rally.

NFLX stock is approaching a critical support level at $93.50, which was tested and held twice last September. I expect this level to hold, and I expect Netflix to rebound toward the $97 level.

While trading Netflix stock can be risky, not to mention pricey, the options market offers a lower-risk way to play a bounce.

Given that implied volatility is at the lowest level since last August following NFLX earnings report, options prices have become comparatively cheap. This favors long option strategies, so a straightforward call calendar trade can position bullishly with defined risk.

Specifically, I would buy the NFLX May $97 calls (expire May 20) and sell the NFLX April 29 weekly $97 calls for a $1.70 net debit.

The spread is net long 7 deltas and also has a nice skew advantage, with the April options being sold trading at a 43 IV versus a cheaper 39 IV on the options being bought.

The maximum risk on the trade is $170 per spread, with the maximum gain achieved if NFLX closes near $97 on April 29 expiration.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.

More From InvestorPlace

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/netflix-inc-nflx-stock-is-down-not-out/.

©2024 InvestorPlace Media, LLC