Option Bulls Befriend Netflix, Inc. (NFLX)

Netflix, Inc. (NFLX) is attracting last-minute call buyers

by Andrea Kramer

Published on Jan 2, 2015 at 1:15 PM
Updated on Apr 20, 2015 at 5:32 PM

Netflix, Inc. (NASDAQ:NFLX) is bucking the broad-market trend lower this afternoon, up 2.6% at $350.55. While a clear-cut catalyst can't be determined -- perhaps it's a spate of bulls emerging from their "Friends" binge yesterday -- the stock is poised to close north of $350 for the first time since Dec. 5, and intraday call volume is running at nearly twice the normal clip.

Digging deeper, it looks like eleventh-hour bulls are buying to open the weekly 1/2 347.50- and 350-strike calls, which expire at the closing bell today. By purchasing the contracts, the traders expect NFLX to extend today's momentum and finish atop the respective strikes. Risk, meanwhile, is limited to the initial premium paid for the calls, should NFLX take a turn for the worse and the calls expire out of the money.

Today's appetite for bullish bets is more of the same for the streaming video provider. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 50-day call/put volume ratio of 1.07 sits just 2 percentage points from an annual high. In other words, option players have initiated bullish bets over bearish at a rapid-fire rate during the past 10 weeks.

The stock's short-term options can be had at a relative discount, even with Netflix's fourth-quarter earnings due after the close on Tuesday, Jan. 20. The security's Schaeffer's Volatility Index (SVI) of 27% stands higher than just 15% of all other readings from the past year, suggesting NFLX's near-term contracts are currently affordable, on a historical basis.

On the charts, NFLX suffered a post-earnings bearish gap in mid-October, and has struggled ever since, underperforming the S&P 500 Index (SPX) by about 30 percentage points during the past three months. However, the equity's 10- and 20-day moving averages just made a bullish cross -- an encouraging sign on the short-term technical front.

Daily Chart of NFLX since September 2014 with 10-Day and 20-Day Moving Averages

Off the charts, Netflix, Inc. (NASDAQ:NFLX) has endured some serious post-earnings price swings. The equity dropped 19.4% in the wake of its aforementioned October report, just three quarters after enjoying a single-session post-earnings surge of 16.5%. Over the past eight quarters, the median move is 12.8%.

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