Netflix Call Options at a Discount This Holiday Season

NFLX stock recently pulled back to a historically bullish trendline

Dec 1, 2017 at 11:32 AM
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Netflix, Inc. (NASDAQ:NFLX) topped out at a record high of $204.38 on Oct. 17. Since then the streaming name has been stair-stepping lower. After suffering its worst one-day drop in a year on Wednesday during the broader tech selloff, NFLX came face-to-face with its 80-day moving average. Similar to one of its fellow FAANG stocks, this trendline has had historically bullish implications for Netflix shares -- and according to two volatility indicators we track, it could be a prime time to buy calls on NFLX.

Taking a closer look at the charts, Netflix stock is up 52% year-to-date to trade at $188.09. Due to its recent retreat, NFLX is now within one standard deviation of its 80-day moving average, after trading well north of this trendline since it contained a pullback in August.

nflx stock daily chart dec 1

According to Schaeffer's Senior Quantitative Analyst Rocky White, in the seven other times this signal has flashed over the past three years, NFLX has gone on to average a one-month, or 21-day, return of 9.58%, and has been positive 86% of the time. Based on the equity's current perch, another move of this magnitude would put Netflix near $206.10 by the new year -- and back into uncharted territory.

Should history repeat itself, a round of bullish brokerage notes could create even bigger tailwinds for the FAANG stock. Despite its longer-term gains, 13 of 33 analysts still maintain a "hold" or "strong sell" rating. The optimism is starting to build, too, with J.P. Morgan Securities today calling Netflix its "top growth pick into 2018," considering its "shares are less well owned relative to the other FANG names."

Plus, there's plenty of room for short sellers to cover their bearish bets. More than 27.3 million NFLX shares are currently sold short, representing 5.6 times the security's average daily pace of trading. This signals potential sideline cash available to help fuel future upside.

Netflix options traders have been quick to bet bullishly in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 1.88 ranks in the 100th annual percentile, meaning calls have been bought to open over puts at a faster-than-usual clip.

Those targeting short-term options are getting a relatively good deal, too. NFLX stock's Schaeffer's Volatility Index (SVI) of 31% ranks in the 18th annual percentile, suggesting low volatility expectations are being priced into near-term contracts. Plus, call options are extremely cheap at the moment relative to their put counterparts, based on Netflix's 30-day implied volatility skew of 15.9%, ranking in the 100th annual percentile.

 

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