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Short-Term Bulls Pounce on Netflix Ahead of Expiration

Weekly call buyers show their confidence in NFLX

by 1/10/2013 2:24 PM
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Netflix, Inc. (NASDAQ:NFLX - 98.23) has been on the bulls' trading radar today, as roughly 27,000 calls have crossed the tape so far. This marks a 45% increase over the security's expected intraday volume, and is almost double the number of puts exchanged. It appears the weekly 1/11 97.50-strike call is seeing a large part of the action, with nearly 4,200 contracts trading at a volume-weighted average price (VWAP) of $1.69.

Digging deeper into the data, a healthy portion of these calls changed hands at the ask price, pointing to buyer-fueled activity. Today's volume exceeds current open interest levels, while implied volatility has climbed 7.9 percentage points during the course of the session -- signaling the establishment of new positions. By purchasing these calls to open, speculators are expecting the shares to muscle north of breakeven at $99.19 (strike price plus the VWAP) by tomorrow's close, which is when these weekly options expire.

Today's campaign for calls shows a rare optimistic attitude toward NFLX. Although short interest on the streaming video service fell by nearly 7% during the last two reporting periods, these bearish plays still represent a hefty 29% of the equity's available float. From a contrarian perspective, the stock could end up reaping the benefits of a short-covering rally down the road, should these skeptics continue to unwind their shorted shares -- good news for traders contemplating the initiation of bullish bets over the near term.

Meanwhile, most of the covering analysts hold a downbeat opinion of NFLX, as well. Only three have deemed the equity worthy of a "strong buy" endorsement, compared to 17 "holds," and eight "sell" or worse suggestions. Even more telling, the stock's average 12-month price target of $69.28 reflects a significant discount to its perch. This leaves plenty of room for future upgrades and/or price-target hikes, which could push the stock higher over the next several weeks. While this may not necessarily have an impact on today's bullish weekly trades, it could be the catalyst that lures more optimistic traders to the options pits.

Technically, NFLX has tacked on about 6% year-to-date -- courtesy of today's 2.4% climb -- and has outperformed the broader S&P 500 Index (SPX) by close to 43 percentage points during the past three months. Should the shares continue this momentum prior to tomorrow's close, the aforementioned call buyers could end up collecting a profit on their weekly positions.


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