Shares of Netflix, Inc. (NASDAQ:NFLX) have certainly been quiet lately. Too quiet. I look for Netflix stock to break out of the doldrums over the next few weeks once Netflix stock makes a meaningful break from the $98 level.
Click to Enlarge Historical volatility is at the 0% percentile. That’s right, the zero percentile. It literally doesn’t get any quieter than that.
NFLX stock has been mired in a narrow trading range at the critical $98 level over the past several weeks. Numerous attempts to break past this critical juncture have been rejected so far.
Click to Enlarge This level has proven to be pivotal in the past, as both a support and a resistance area.
Once Netflix stock decides which way it wants to head, the move very well may be explosive. The highlighted areas indicate similar moves from the $98 level in in the past, which all corresponded to significant moves in shares.
NFLX has put in a series of lower highs and higher lows with shares coiling tighter and tighter. The Bollinger bands are at the lowest levels of the year, which has been a reliable contrary indicator of an impending breakout in the past.
How to Play the Netflix Breakout
So to play a breakout in Netflix, I like positioning with a long straddle play. With shares trading hands at $97.50, a straddle would involve buying both the $97.50 call and $97.50 put. Since option implied volatility is at comparatively low levels, straddle prices are super cheap.
How cheap? I looked back at the last time NFLX was trading at a similar price and a similar period in the earnings cycle.
Click to Enlarge Going back to May 24, with Netflix stock at $97.89 and 31 days to expiration (and a holiday weekend as well), the $97.50 straddle was priced at $7.70. (7.86% of the stock price)
Now, the same straddle with Netflix stock at $97.38 and 30 days to expiration (and a holiday weekend) is priced at just $6.05. (6.22% of the stock price).
The straddle certainly has cheapened dramatically.
Plus, there is always the ever present takeout chatter with names like Walt Disney Co (NYSE:DIS) being mentioned.
Buy the NFLX Sep $97.50 calls and buy the NFLX Sep $97.50 puts for a $6.05 total debit.
Maximum risk on the trade is $605 per straddle. I would look to revisit the trade in mid September and reduce the position if NFLX is still mired in the trading range.
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.
