Netflix Options Traders See 13% Stock Rally

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Netflix Options Traders See 13% Stock Rally

(Please keep in mind that the author of this fundamental analysis is a financial writer and portfolio manager.) He and his clients possess NFLX stock.)

Netflix Inc. (NFLX) shares have risen by more than 40% in 2018, while the wider S&P 500 Index has been a rollercoaster ride, staying around flat in the first few weeks of the year. Despite the large gains, options traders believe Netflix will continue to grow, maybe by as much as 13% by June. This would bring Netflix’s stock price past $300, adding to what seems to be an unsustainable rise.

Options traders are strongly positive, with call bets outweighing put bets by roughly a 6 to 1 ratio. Given the recent volatility in the wider stock market, traders’ confidence is unexpected. The InvestopediaAnxiety Index is now around its highest level since the beginning of 2017, indicating that investors are still concerned about the current condition of the stock market. (For further information, see The Investopedia Anxiety Index Explained.)

However, Netflix outperformed the overall market, plunging by just over 8% at its lowest point, compared to the S&P 500, which fell by more than 10% at its lowest point since January 26.

Improving Fundamentals

The bullishness of options traders might just be a reflection of Netflix’s excellent underlying fundamentals. According to consensus predictions, first-quarter sales will increase by about 40% to $3.689 billion, while profits will increase by around 58 percent to $0.63 per share.

Those are big growth figures for the firm, but what’s more surprising is that they are not limited to a single quarter. According to YCharts, analysts anticipate sales growth of 36% to $15.84 billion in 2018 and profits growth of 116% to $2.70 per share.

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(Interactive Brokers)

Bullish Bets

The options transactions reflect that confidence, with traders employing the long straddle options strategy anticipating the price of Netflix to climb or fall by almost 13.5 percent from its $270 strike price. One put and one call option costs almost $36 and puts the stock in a trading range of $235 to $305.

The number of calls outnumbers the number of puts by over 6 to 1, with around 2,160 calls of open interest at the $270 price, with a notional value of nearly $5.4 million.

A Rise To $313

Some traders estimate Netflix stock to reach about $313 by June, with roughly 3,000 calls active at the $300 strike price. The options are worth about $4 million. That’s a large wager for options that need to increase to $313 simply to break even, and a stock price that’s nearly 17% lower than its current price of $268.

For the time being, optimistic options traders may have a basis for their favorable bets based on the company’s growth prospects. However, another market decline like the one we recently saw might increase investor fear. And it may be enough to send the bulls galloping in the other direction.

Michael Kramer is the Founder and Manager of Mott Capital Management LLC, a registered investment advisor, and the manager of the firm’s actively managed, long-only Thematic Growth Portfolio. Kramer normally purchases and keeps equities for three to five years. Click here to see Kramer’s profile and portfolio holdings. The information offered is only for educational purposes and does not constitute an offer or solicitation to sell or buy any particular stocks, assets, or financial strategies. Unless otherwise specified, investments involve risk and are not guaranteed. Before adopting any of the strategies outlined here, contact with a knowledgeable financial advisor and/or tax expert. The adviser will offer a list of all suggestions made in the previous twelve months upon request. Past performance does not predict future performance.

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