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Netflix, Inc. (NFLX) Option Buyers Think This Rally Has Legs

A bullish analyst note sparked a flood of call buying on NFLX

by 4/15/2013 1:09 PM
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The shares of Netflix, Inc. (NASDAQ:NFLX) are flying in the face of broad-market headwinds, up 2.8% at $178.05, and option traders see more upside ahead. Around midday, the streaming video concern has seen roughly 42,000 calls cross the tape, representing a 62% mark-up to its average intraday call volume. Most popular have been front-month strikes, meaning speculators are gambling on a notable rally by the end of the week, before April-dated options expire.

More specifically, traders are picking up the April 180- and 185-strike calls, which have seen around 6,300 and 5,900 contracts change hands, respectively. Volume has surpassed open interest at both strikes, and the majority of the calls traded on the ask side, pointing to newly bought bullish bets.

By purchasing the 180-strike calls at a volume-weighted average price (VWAP) of $4.51, the buyers will begin to make money if Netflix, Inc. topples $184.51 (strike price plus VWAP) by Friday's close. Meanwhile, the 185-strike calls traded at a VWAP of $2.73, indicating a breakeven of $187.73 for the buyers. From NFLX's current perch, it would take a rally of around 3.6% and 5.4%, respectively, in order for the stock to hit the breakeven. However, even if NFLX remains beneath the strikes through the end of the week, the most the buyers can lose is the initial premium paid for the calls.

While Netflix puts were popular last week, today's appetite for short-term calls -- as well as the stock's ascent -- was likely inspired by a bullish brokerage note. BTIG Research analyst Rich Greenfield launched coverage of the stock with a "buy" rating and a $250 price target, according to Barron's. From the stock's current price, this target represents expected upside of roughly 40%, and stands in territory not charted by the shares since August 2011.

Despite outperforming the broader S&P 500 Index (SPX) by nearly 65 percentage points during the past three months, NFLX remains plagued by pessimism among the analyst community. Just six brokerage firms offer up "strong buys," compared to 16 harboring "holds" and four with "sell" or worse suggestions. Plus, the average 12-month price target of $141.46 represents a significant discount to Netflix's current price.

Should NFLX extend its upward momentum -- or should the firm report stronger-than-expected earnings on Monday, April 22 -- more bullish brokerage attention could add contrarian fuel to the fire.


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