(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 have been rocketing higher since the start of the new year, with the stock up by over 15 percent. But with its 4Q earnings release expected on January 22 after the close of trading, investors may be getting too bullish. An analysis of the options market suggests that traders are looking for Netflix to rise by 10 percent by the middle of February. 

When Netflix last reported its financial results, the stock price ran up by nearly 12 percent in weeks before the results, followed by a drop of about 5 percent by the week after the results. The same situation may be developing again over the short-term, as investor expectations for a big earnings beat rise. 

Bullish Options Bets

The long straddle options strategy suggests that the price of Netflix could rise or fall by nearly 10 percent by expiration on February 16. That is because it costs almost $21 to buy both a put and a call, placing the stock in a trading range of roughly $200 to $240.

But the number of calls heavily outweighs the puts by nearly 9 to 1, with 9,000 calls of open interest versus open interest of 1,500 put contracts. The $230 strike price calls have an open interest of over 6,000 contracts, needing the stock price to rise to over $236 just for them to break even. Meanwhile, the puts with most substantial open interest are at the $210 strike price, with only 3,900. 

(Interactive Brokers)

Chart Suggest Shares Are Stretched

Technical analysis also suggests the stock looks stretched, trading with a relative strength index over 70, at 72. The stock recently broke out, rising above resistance around $215, and to this point has been able to stay above that rising trend line. Should the stock break that trend line, the price is likely to fall back towards $205. 


Big Run-Up Again

Before the company reported its third-quarter results on October 16, shares ran up from around $178, peaking at $202, before the release of the results. That's a rise of nearly 13 percent. Following the financial results, the stock retreated to support at $192, a decline of about 5 percent. (See also: Netflix Is Obsessed With Binge Watching and It's a Problem.)

The big run-up in the stock price before the financial results and the significant option bets is a sign that the market is looking for a big 4Q earnings beat from Netflix. And that may be setting the company up to disappoint, resulting in shares falling in the short term. 

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 holdingsInformation 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.