(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX.)
Netflix Inc.'s (NFLX) stock has almost doubled thus far in 2018. But shares of the streaming media company fell by more than 24% in the middle of July after reporting disappointing subscriber additions in the second quarter. Even worse, the company guided the revenue outlook for the third quarter below analysts’ estimates, and that sent shares into a tailspin. The stock has recovered some, and the technical chart suggests the stock may rise 7% more in the coming weeks. (For more, see also: Netflix in Correction, but Still Huge 2018 Leader.)
At least some options traders are betting the stock continues its rebound. Some see shares rising by as much as 15% by the start of next year. That would take the stock back to its previous highs around $425 from its current price of around $370.
A Rise to $400
Shares of Netflix broke out at the start of August when it crossed above a bearish downtrend. However, the stock still struggled for some time before beginning its rebound. Now the stock is rising and could climb back to $400, an increase of 8 from the current price. The stock created a gap when it fell from $400 to $380 following the disappointing earnings results. Now the stock is working to refill that gap.
Another positive is the relative strength index which has now hit oversold levels at 30 two times. It could signal a reversal of the bearish momentum.
The options at the $370 strike price suggest the stock is due to rise by the start of next year. The calls at that strike price outweigh the puts by about 3 to 1, with 3,000 open call contracts. A buyer of the calls would need the stock's price to rise to roughly $406 by the start of the year to break even if holding the calls until the middle of January, a gain of about 10%. It is not a small wager, with the open call contracts worth roughly $10 million.
Some traders are betting shares rise even higher. The open calls at the $400 strike price have increased to more than 7,000 contracts. The stock would need to rise to $425, for a buyer of the calls to earn a profit if holding until expiration, a rise of roughly 15%. The value of the open interest at that strike price is more than $16 million, another large wager. (For more, see also: Why Netflix May Fall 15% From Its High.)
At least for the time being it would seem Netflix stock is starting to see some bullish momentum again. But as investors learned a few weeks ago, it can all change at a moment’s notice.
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.