The next earnings season is a little less than a month away, but now may be a great time to position yourself for a few key trades.
One earnings-related trade you should be considering is Netflix, Inc. (NASDAQ:NFLX). The company is slated to step into the earnings confessional on October 17, and Netflix stock has a history of rallying ahead of its quarterly reports — as well as big post-earnings moves. And with implieds sure to rise as the date draws nearer, options traders will want to get a head start on NFLX.
As of this morning, implied volatility for October 21 series options is pricing in a potential post-earnings move of about 10% for Netflix stock. From an historical perspective, this reading is on the low side, with implieds typically pricing in a move of about 14% or more
In other words, NFLX options are “cheap” right now.
Click to Enlarge Judging from current levels, options traders are expecting Netflix stock to potentially fall as low as $86.68 or rally as high as $107.32 following the company’s quarterly report. Technically, $100 has been a major hurdle for NFLX this year, capping most of the stock’s breakout attempts. Longer-term resistance lies near $110.
As for support, $95 is the short-term backstop, having supported Netflix stock since mid-August. The long-term support level lies at $80.
In short, there is plenty of room for movement before NFLX hits any significant technical hurdles, providing options traders with ample wiggle room.
Turning toward earnings expectations, Wall Street is targeting a profit of 6 cents per share — down a penny from year-ago results. Revenue is expected to surge 31.4% to $2.28 billion.
That said, revenue guidance could be an issue for Netflix stock, as the company just announced that it is upping original content lineup, including additions to reality TV and competition shows. Netflix budget for original content for the current year is $6 billion, and any additions to this could hit the bottom line. What’s more, Netflix needs to show some solid overseas subscriber growth with this quarterly report, given that U.S. subscriber growth has slowed noticeably.
On the sentiment front, analysts have grown quite bullish on Netflix stock. According to data from Thomson/First Call, 26 of the 43 analysts following NFLX rate the stock a “buy” or better. Additionally, the 12-month price target of $104.68 represents a premium of only about 7% to yesterday’s close.
Revisiting options on Netflix stock, short-term speculators are growing more bullish on the shares. Currently, the October put/call open interest ratio rests at 0.77, with calls holding their lead over puts among options most affected by next month’s quarterly report. What’s more, this ratio is falling, dipping from the high 0.80s in the past two weeks.
Rising call OI could be a sign of growing concern from short sellers. As of the most recent reporting period, 33.5 million shares of Netflix stock were sold short, accounting for 7.94% of the stock’s total float.
Short sellers will often buy call options as a means to hedge their positions against losses, and a continued rise in NFLX call OI could be a bullish sign for the shares.
2 Trades for Netflix Stock
Call Spread: While subscriber growth and content spending are certainly major concerns, Netflix stock traders and analysts are already aware and have priced these issues into the shares. As such, barring any major surprises, the path of least resistance should be to the upside for NFLX.
Traders looking for a bullish position on Netflix stock might want to consider an Oct $100/$105 bull call spread. At last check, this spread was offered at $1.38, or $138 per pair of contracts. Breakeven rests at $101.38, while a maximum profit of $3.62, or $362 per pair of contracts, is possible if Netflix stock closes at or above $105 when October options expire.
Put Sell: For those looking for a more neutral-to-bullish stance, an Oct $85 put sell has a high probability of finishing out of the money. At last check, this put was bid at $1.23, or $123 per contract.
As usual with a put sell, you keep the premium as long as Netflix stock closes above $85 when October options expire. On the downside, if NFLX trades below $85 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $85 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
