Why It Might Be a Bad Idea to Bet Against Netflix, Inc. (NFLX)

Netflix, Inc. (NASDAQ:NFLX) has started 2016 on a slow note, but that doesn't mean you should bet against it just yet

Jan 5, 2016 at 11:36 AM
facebook twitter linkedin

Like most stocks, Netflix, Inc. (NASDAQ:NFLX) has had a horrible start to the year. Today, shares of the streaming video giant are down 1.7% at $108.09. These losses come just a day after the stock got smacked with a bearish note at Baird. In the meantime, activity has picked up in NFLX's options pits.

Both calls and puts are slightly accelerated in today's trading, compared to average volumes, and the weekly 1/8 series in particular is seeing heavy attention. The most popular strike is the 110 call, and it looks like sell-to-open activity is taking place here. In other words, instead of using them as a bullish vehicle, traders are using calls to bet against NFLX, essentially saying the stock will remain below $110 through week's end, when the weekly series expires. 

However, it's not usually a good idea to sell premium on NFLX. The stock's Schaeffer's Volatility Scorecard (SVS) of 98 indicates the equity has had a strong tendency to make outsized moves compared to what the option market has priced in, according to data from the previous year. 

Looking back, it's been call buying that's dominated the entertainment stock's options pits. According to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), NFLX boasts a 50-day call/put volume ratio of 1.34, a reading that tops 89% of all others, going back 12 months. To put it simply, call buying has been even more popular than usual in recent weeks. 

But that's definitely not to say everyone's bought into NFLX. Put open interest still outweighs call open interest among near-term options, with the stock's Schaeffer's put/call open interest ratio (SOIR) coming in at 1.33. What's more, ten of the 27 brokerage firms that track the shares rate them a "hold" or "strong sell." 

And as most are aware, NFLX has been one of the best performing stocks on Wall Street. At this time last year, the shares were trading at just $46.50. As such, if NFLX can regain its footing on the charts, an unwinding of the remaining negativity could drive the shares higher.

This is especially true as Netflix, Inc. (NASDAQ:NFLX) nears oversold territory. The stock's 14-day Relative Strength Index (RSI) sits down at 37, suggesting a bounce could soon be in the cards. Elsewhere, the company just announced an expansion of its partnership with Dreamworks Animation Skg Inc (NASDAQ:DWA)

Now is the time to join our thriving community of Event Traders who consistently profit from every earnings season. With this discounted subscription opportunity, you'll stay ahead of the curve and seize opportunities others miss. Do not let Q3 earnings season pass you by – subscribe now and supercharge your portfolio with expert insights that turn market reactions into profit-generating opportunities!! Don't waste another second... join us right now before the next trade targeting +200% is released!