If you subscribe to what other Netflix, Inc. (NASDAQ:NFLX) bulls are saying, NFLX stock is a buy. But with earnings on deck, using a short-term, bullishly positioned butterfly spread in lieu of long stock is the favored play. Let me explain.
Netflix earnings are scheduled to be released after the close Monday night with bulls maintaining squatter’s rights in front of the report.
Wall Street expects the streaming video on demand, or SVOD, giant to deliver strong earnings growth generating profits of 32 cents for the third quarter. That’s up 167% from 2016’s same quarter 12-cent result.
The whisper number for NFLX earnings is even more bullish. Consensus views are pegging profits of 34 cents and two cents above official estimates. At the same time, Netflix’s revenue growth is forecasted to improve on the company’s impressive history with analysts looking for an increase of 30% on sales of $2.97 billion.
Behind the headline revenue number, investors will be looking for Netflix to add 750,000 subscribers based on company guidance. Wall Street has been driving shares higher of late in part on the belief NFLX stock will actually beat views.
On Friday, J.P. Morgan added its own two cents or more aptly, $15, in raising its price target from $210 to $225 and stating it expects 800,000 in subscriber additions.
NFLX Stock Daily Chart
Click to Enlarge NFLX stock remains one of the more contentious large capitalization names with its share of bears as evidenced by its current and fairly high short interest of 7.61%. But as the provided weekly chart of shows, that’s been a tough position to maintain.
Over the past 12 months since initially breaking out above pivot resistance within a two-year cup-shaped base, shares of Netflix have moved into a firm and steady uptrend that’s tacked on 97% for bullish investors fully-subscribed to the NFLX stock narrative.
In the here and now and shares less than 5% above a third weekly base breakout pivot from a cup base, a long delta position looks reasonable, but be advised, would-be investors aren’t early in entering into NFLX’s price trend at this point in time.
Supporting our cautious view is a combination of NFLX stock’s strong gains of the past year and profit-taking psychology surrounding whole numbers such as the current situation at $200. As well, while third stage bases can provide strong returns, deeper corrective patterns that test the mettle of bullish investors are often right around the corner.
NFLX Stock Bullishly Positioned Butterfly
In last writing about Netflix as part of a FANG gallery article, I proffered a NFLX options strategy coined a modified bullish fence. It’s done well in moving from even money with shares at $187.35 to a market price and profit of $2.00. In our opinion and based on what’s been discussed technically, I also think it’s a great time to take profits in front of the report. The reality is it would take very little to see a nice return vanish literally overnight.
Reviewing NFLX’s options for fresh ideas, buying the Oct $210/$220/$230 call butterfly is a favored earnings play for moderately bullish traders. While this spread requires additional upside versus the modified fence, risk exposure is modest in the event shares trade aggressively lower.
Priced for $1.15 with shares at $199.48 or just over 0.50% of NFLX stock, the spread offers an attractive expiration profit range from $211.15 to $228.85. The low end of the range is just more than 5% above the current Netflix share price.
It sounds like a lot, but with three of the last six earnings reactions settling up or down by roughly 13% and one move of 19%, that objective is easily within reach if recent historical trends continue.
Moreover, if NFLX stock finds itself at $220 and up around 10.25% at the end of the trading week, a max profit capture nearing $8.85 is possible. That would be a return in excess of 750%! However, it should also be noted the real threat to this bullishly-positioned butterfly is too much upside in Netflix shares.
Bottom line, if shares rally more than 15% over the five day period the embedded verticals cancel one another out and the trader forfeits the debit. But as the “top-line” loss of sorts would be at the high-end of NFLX’s price tendencies and shares up 21% at all-time-highs since the last reporting — that’s a worthwhile proposition in our book.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.