(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX.)
Netflix Inc. (NFLX) shares are closing in on $205, and are on the cusp of breaking out again. In a recent Investopedia article, we noted that Netflix stock was breaking out and could be on its way to $205. With the stock now trading around $203, Netflix is on the verge of another breakout, one that could trigger a rise of 17 percent.
Should Netflix break out, the options market is betting the online streaming giant could rise to roughly $235 a share based on the options set to expire on June 15.
The chart below shows how the stock has rocketed higher since breaking out at $190 and is now nearing all-time highs at $205.
Netflix has also broken a downtrend that had been in place since early October 2017, when the stock first reached the price of nearly $205. Should the stock rise above $205 this time, it would clear resistance, creating an opportunity for the shares to run higher.
The options market provides an excellent guide to determine just how much room Netflix has to rise should the breakout occur. The options set to expire on June 18, are looking for Netflix to rise or fall by nearly 17 percent from its current price, using the $200 strike price. That puts the stock in a range in a trading range of $163.65 to $236.5.
But the number of calls outnumber the puts by a ratio of nearly 5-to-1. With the calls trading at a price of about $21 per contract, it equates to a notional value of almost $10.5 million at that strike price.
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The $230 strike price calls also have a significant open interest of about 4,000 contracts and are trading at a price of nearly $9. That equates to a notional value of about $4.5 million, while the price of the stock would need to rise to $238.50 just for the options to break even. That's an increase of nearly 18 percent.
The puts with the largest open interest rest at $150, with almost 7,500 contracts of open interest. But the notional value of those contracts are only $2 million, by comparison, a much smaller bet. (See also: Citi: 40% Chance of Apple Acquiring Netflix.)
With another technical breakout lurking and options traders betting on the stock to rise, the setup for Netflix appears positive. But all of this positive momentum could go to ruins when the company reports its fourth-quarter 2017 results on January 22 after the close of trading. That's something the market will be patiently waiting on.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.