Netflix Stock: The Decline May Just Be Starting


Oct. 18 2019, Updated 5:46 p.m. ET

In the October 18 trading session, Netflix stock (NFLX) closed at $275.30, down 6.15% from the previous session. This performance lagged behind the S&P 500’s 0.39% decrease on the day. The Dow Jones lost 0.95%, while the Nasdaq plunged 0.82%.

Moreover, Netflix stock has returned -1.8% over the past month. So NFLX stock has outperformed the broader entertainment industry. The industry returned -2.8% in that timeframe.

An analysis of the options market suggests some traders are actively betting Netflix stock will plunge in the coming weeks and months. With that in mind, let’s discuss the stock’s recent options trades and what they mean for investors.

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A 7% move in Netflix stock

The implied volatility for the options, at a $275.00 strike price that expires on November 15, stands at 34.91% for Netflix stock. This number means investors are expecting an event to cause a moderate movement in one direction or the other.

Let’s look now at the November 15 options. I see a bid/ask for the $275.00 call option of $10.30/$ 11.10. I also see a bid/ask for the $275.00 put option of $ 9.65/$ 10.30. Note the options strike closest to the previous NFLX closing price of $275.30. Using the mid-prices, you can calculate the expected price move:

9.975 (275.00 put) + 10.70 (275.00 call) = 20.675/275.30 = 7.5%

As you can see, the options imply that NFLX could rise or fall by ~7% by the November expirations from the $275.00 strike price, based on the long straddle strategy. This assessment would place the stock in a trading range of $254.62–$295.95 by the expiration date. The puts at the $275.00 strike price outweigh the call options by about 2:1. There are 6,409 open puts to 3,171 open calls.

It’s also worth noting that the puts at the $260.00 strike price outweigh the call options by about 5:1 with 3,849 open puts to 775 open calls. A buyer of the $260 strike price calls would need Netflix stock to rise to around $255.7 by the expiration date in order to break even. This imbalance suggests some bearish market sentiment for Netflix.

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Bearish options bets on Netflix stock

The options, which expire on November 15, saw increased put buying in the last trading session. According to Barchart.com, the open interest for the $300 puts rose by 3,998 contracts to a total of 5,550 open contracts. For the buyer of the $300 puts to earn a profit, the stock would need to fall to around $272.70.

Also, the open interest levels for November 15 $310 puts increased significantly over the past week. According to Barchart.com, the open contracts rose by 7,525 contracts to about 8,121. Netflix, then, is a large, bearish bet. The open interest represents a total dollar value of about $29 million. For the buyer of the $310 puts to earn a profit, Netflix stock would need to plunge to around $273.8.

Additionally, in today’s trading session, the open interest for the $310.00 calls that expire on November 15 rose by 7,490 contracts to a total of 9,125 open contracts. At first glance, you could interpret these numbers as a bullish bet. But this transaction traded near the bid price, suggesting the calls were sold.

Having said all that, Netflix a bearish bet right now. Consider that Netflix stock should stay below $308.65 to earn a profit for the options holder.

Analysts’ coverage and target prices for Netflix stock

Wall Street analysts have upgraded NFLX over the last six months. Despite concerns, most analysts remain bullish on the stock. The consensus price target was $ 364.95, which represents a 32.56% upside. See Market Beat for a detailed breakdown. According to TipRanks, NFLX is a “moderate buy” with an average price target of $377.39, representing a 37.08% upside.

Looking for more companies that options traders are actively betting against? Check out General Electric Stock: Be Careful, Investors and Tesla: Why Demand Could Be a Concern.


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