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Netflix Buzz Generates Weekly Option Trades

Lots of NFLX news draws bears and bulls alike to weekly calls and puts

by 2/1/2013 11:44 AM
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Netflix, Inc. (NASDAQ:NFLX 170.66) is getting a lot of positive buzz recently as it launches its first-ever self-produced TV series tonight, while a recent report indicates that the company is serving about one-quarter of all U.S. households -- and that 55% of all households use streaming video of some sort. All of this news -- plus a recently announced stock offering and a strong positive earnings surprise -- has attracted options traders. Today, both put volume and call volume is outpacing what's typically seen on an intraday basis, with roughly 28,000 puts and 25,000 calls changing hands.

Option traders have rarely been so bearish on NFLX in the last 12 months. In fact, Schaeffer's put/call open interest ratio (SOIR) for NFLX stands at 1.66, just 2 percentage points below the highest reading taken in the last 12 months. And the security's 10-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/NASDAQ OMX PHLX (PHLX) put/call volume ratio stands at 1.25, which is in the 86th percentile among readings taken in the last 12 months.

Weekly calls that expire today are currently the most popular play on NFLX. Nearly 5,800 2/1 175-strike calls have crossed the tape so far today at a volume-weighted average price (VWAP) of $0.78. Volume at this strike today exceeds open interest, suggesting the trades are the work of very short-term investors looking to profit by the end of the day. The stock needs to finish above $175.78 (strike price plus VWAP) at today's close to earn a profit -- requiring an increase of 3% from current levels. Also, the current delta for that option is 15%, meaning the options market doesn't give these contracts much of a chance of expiring in the money.

Almost as popular, however, have been bearish weekly puts. More than 4,900 2/1 165-strike puts and nearly 3,700 2/1 170-strike puts have traded so far today. The VWAP on the 165 put is $.0.44, meaning the stock has to drop 3.6% below its current level to finish below $164.56 (strike price minus VWAP) to be profitable. And the 170 puts traded at a VWAP of $1.94, meaning the stock has to finish below $168.06 to finish in profitable territory. That's a 1.5% discount to current levels.

The bulls did receive some ammunition this morning, however: NFLX's price target was raised to $200 from $160 by Morgan Stanley. And NFLX has jumped nearly 3% today. In fact, the stock is up nearly 84% year-to-date, spurred by its earnings release on Jan. 23. The company announced earnings per share of 13 cents, roundly beating the consensus estimate of negative 13 cents.


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