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Netflix Speculators Rush the Options Pits

NFLX's post-earnings rally attracted a flood of weekly option traders

by 1/25/2013 9:25 AM
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As Netflix, Inc. (NASDAQ:NFLX - 146.86) dominated headlines yesterday, options traders rushed to place their (very) short-term bets. When all was said and done, the streaming content concern saw roughly 123,000 calls and 124,000 puts change hands, far surpassing its average single-session volume of about 26,000 calls and 23,000 puts.

More specifically, weekly options were the main draw for both bulls and bears. On the call side, optimists picked up weekly 1/25 145-strike calls, which saw nearly 9,900 contracts cross the tape at a volume-weighted average price (VWAP) of $2.58. The majority of the calls traded at the ask price, and open interest swelled overnight, pointing to newly bought eleventh-hour bets.

By purchasing the calls to open, the buyers were betting on NFLX to extend yesterday's earnings-induced rally to new highs. Breakeven on the trade is $147.58 (strike plus VWAP) -- a level NFLX toppled briefly in intraday trading, after touching a new annual acme of $149.17.

However, not all of the call activity was of the bullish variety. More than 9,000 contracts changed hands at the weekly 1/25 150-strike call -- mostly at the bid price, suggesting they were sold. Plus, open interest at the soon-to-expire strike increased overnight, underscoring our theory of newly opened positions. By writing the calls to open, the sellers expect NFLX to remain south of $150 through the closing bell. In this best-case scenario, the calls will expire worthless, allowing the sellers to retain the entire premium received at initiation.

Meanwhile, more traditional bears took a shine to the weekly 1/25 140-strike put, which saw close to 11,000 contracts exchanged -- the most of any strike. The bulk of the puts crossed at the ask price, and open interest escalated overnight, once again hinting at buy-to-open volume. By purchasing the puts at a VWAP of $1.65, the buyers expect NFLX to backpedal beneath the $138.35 level (strike minus VWAP) by the end of the day.

Expanding our sentiment scope, there are likely plenty of skeptics shaking their fists in the wake of NFLX's bullish gap (as Schaeffer's Senior Equity Analyst Joe Bell alluded to in a recent Fox Business interview). The stock's Schaeffer's put/call open interest ratio (SOIR) stands at a 52-week peak of 1.36, indicating that near-term options traders haven't been more put-heavy at any other time during the past year. Furthermore, the equity's jump caught many analysts off-guard, and with 27% of NFLX's float sold short, probably spooked a few short sellers too.

Ahead of the bell, the shares spent time on both sides of breakeven, and are poised to open 0.1% higher.


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