Netflix Options Traders See 13% Stock Rally

(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 soared in 2018, rising by over 40 percent, while the broader S&P 500 Index has been a rollercoaster ride, hovering around flat through the first few weeks of the year. Despite the significant gains, options traders are betting Netflix will continue to rise, perhaps as much as 13 percent by June. This would push Netflix's stock price above $300 on what already seems like an unsustainable spike. 

Options traders are overwhelmingly bullish, with call bets outweighing the puts by a ratio of nearly 6 to 1. The optimism among traders is surprising given the recent volatility in the broader stock market. The Investopedia Anxiety Index currently stands at almost 112, which is near its highest reading since the start of 2017, suggesting that investors are still nervous about the current state of the stock market. (See also: The Investopedia Anxiety Index Explained.)

But interestingly, Netflix performed better than the broader market, falling by just over 8 percent at its low point, compared to the S&P 500, which declined over 10 percent at its lowest, since January 26.

Improving Fundamentals

Options traders' bullishness could merely be a reflection of Netflix's strong underlying fundamentals. Consensus estimates are calling for first-quarter revenue to rise by nearly 40 percent to $3.689 billion, while earnings are expected to grow about 58 percent to $0.63 a share. 

Those are significant growth numbers for the company, but more impressive is that it is not only for one quarter. Analysts are looking for revenue growth of 36 percent in 2018 to $15.84 billion, and earnings growth of 116 percent to $2.70 a share, according to YCharts. 

(Interactive Brokers)

Bullish Bets

The options trades reflect that optimism, with traders expecting the price of Netflix to rise or fall by nearly 13.5 percent from its $270 strike price using the long straddle options strategy. It costs almost $36 to buy one put and one call contract, putting the stock in a trading range between $235 and $305. 

The numbers of calls heavily outweigh the puts by a ratio of nearly 6 to 1, with roughly 2,160 calls of open interest at the $270 price, with a notional value of almost $5.4 million.

A Rise To $313

Some traders even expect Netflix stock to climb to nearly $313 by June, with almost 3,000 calls of open interest at the $300 strike price. The options hold a value of roughly $4 million. That's a big bet for options that would need to rise to $313 just to break even, and a stock price that is about 17 percent lower, based on its current price of $268. 

For now, the bullish options traders may have a reason for their positive positions based on the outlook for the company's growth. But another market drawdown like the one we just saw could cause investor anxiety to spike. And that could be enough to send the bulls running the other way.

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.

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