(Note: The writer of this fundamental analysis is a portfolio manager and financial writer. He and his customers possess NFLX stock.)
While the wider S&P 500 Index has been a rollercoaster, remaining about flat during the first few weeks of the year, Netflix Inc. (NFLX) shares have surged in 2018, surging by almost 40%. Despite the large increases, options traders predict Netflix’s price will grow further, maybe by as much as 13 percent by June. This would increase Netflix’s stock price from what already seems to be an unsustainable surge to over $300.
The majority of options traders are optimistic, with call bets outpacing put bets by a ratio of over 6 to 1. Given the recent volatility in the larger stock market, traders’ confidence is unexpected. The Investopedia Anxiety Index is now close to 112, which is close to its highest value since the beginning of 2017, indicating that investors are still uneasy about the status of the stock market as of this writing. (Read more about the Investopedia Anxiety Index here.)
However, it’s notable to note that Netflix outperformed the general market, down by just over 8% at its lowest position since January 26 as opposed to the S&P 500, which fell by over 10% at its lowest point.
The optimism among options traders may just be a result of Netflix’s solid underlying fundamentals. According to consensus projections, first-quarter sales will increase by about 40% to $3.689 billion, while first-quarter profits will increase by approximately 58 percent to $0.63 per share.
Even though they are great growth rates for the organization, the fact that they extend beyond just one quarter is even more remarkable. According to YCharts, analysts anticipate sales growth of 36% to $15.84 billion and profits growth of 116% to $2.70 per share in 2018.
The long straddle options method, used by traders, predicts that Netflix’s price will increase or decrease by about 13.5 percent from its $270 strike price. The transactions reflect this confidence. One put and one call option cost nearly $36 to purchase, placing the stock’s trading range between $235 and $305.
With around 2,160 calls of open interest at the $270 price and a notional value of over $5.4 million, the number of calls outweighs the number of puts by a ratio of almost 6 to 1.
A Rise To $313
With approximately 3,000 open calls at the $300 strike price, some traders even predict that Netflix stock will increase to about $313 by the end of June. The options are worth almost $4 million. That’s a significant wager for options, which, based on the stock’s current price of $268, would need to increase to $313 simply to break even.
The expectation for the company’s expansion may, for the time being, provide the bullish options traders with justification for their optimistic bets. However, another market decline similar to the one we recently saw might heighten investor apprehension. And that could be sufficient to cause the bulls to flee.
The owner and manager of the actively managed, long-only Thematic Growth Portfolio atMott Capital Management LLC, a registered investment advisor, is Michael Kramer. Kramer often invests in equities and retains them for three to five years. For more on Kramer’s background and assets, go here. The information provided is only for educational reasons and is not meant to be a solicitation or an offer to buy or sell any particular securities, investments, or financial strategies. Unless otherwise noted, investments entail risk and cannot be guaranteed. Before putting any of the strategies described here into action, be sure to speak with a skilled financial advisor and/or tax expert first. The adviser will offer a list of all suggestions made in the previous year upon request. Performance in the past does not guarantee performance in the future.
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