Netflix Options (NFLX): Unusual Trading Activity

| April 23, 2012 | 0 Comments

NFLX OptionsOptions in DVD and streaming TV giant Netflix (NFLX) are showing an enormous amount of unusual trading activity this morning.

We’re going to hear earnings from 60% of the companies in the S&P 500 this week.  The first mega giant to kick things off today after the close is NFLX.

Netflix should be an interesting read, there are many traders that are not very excited about this name.

Today, the stock is down almost 4% to $103.05, with gigantic options trades being made on the bearish side.

One trade came seconds after this morning’s bloody market open.

The trade he made was the purchase of put spreads.  This bearish strategy is made by buying one put option and then selling another put option at a lower strike.

In this aggressive trade, the trader bought 7,500 contracts of the April (weekly’s) $105 strike put options for an average price of $8.00.  At the same time, he sold 7,500 contracts of the April (weekly’s) $85 strike put options for $1.10.  A total cost of $5,175,000.  That’s a monster position!

This option trader must have strong conviction that Netflix is going to move substantially lower.

If he’s correct, his profits will be larger.  Remember, when buying a put spread, the maximum profit is the difference between the strike prices minus the amount paid for the spread.

In this case, he paid $6.90 a piece.  In other words, his maximum profit comes if NFLX trades below $85 a share by the end of the week.  And with a $15 difference between strike prices, his profit will max out at a hefty $6,075,000 ($8.10 per share).

This is a smart option trader.  He’s limiting his overall exposure to 6% of the stock price.

In addition, according to our tracking system this trade carries an even 50% probability this trader will earn money.

As a professional option trader, I wouldn’t hesitate at all to make this same trade.

It seems clear that today’s huge trade on the NFLX comes on the heels of some disturbing news on how Netflix is going to gain revenue share moving forward.

As I’m sure you know, Netflix operates a fast-growing DVD rental and video streaming service.  It’s available in the United States, Canada, and in other international countries.

They deliver digital content to PCs, Internet-connected TVs, and consumer electronic devices.  Some include the Xbox 360, Playstation, and Wii.

Here’s the problem…

The premium cable channel Starz that owns streaming rights to Disney and Sony movies announced in early September that it doesn’t plan to renew its deal with Netflix.

And with its content being removed from customer queues, the inexpensive price tag to use NFLX is poised higher.

Netflix also relies on unlimited bandwidth usage for its offerings. Subscribers generate as much as 20% of all streaming internet traffic.

However, there’s been many rumors that broadband providers could be moving to a pay-for-use model.  This will also greatly increase the cost for Netflix subscribers.

So, I think this earnings report is going to come down to its guidance and how these points are going to affect NFLX moving into the future.

If they’re concerned, so should you be.  We’ll wait and see.

For more detailed information on unusual options activity and how you can profit from it, be sure to sign-up for our daily newsletter, Options Trading Research.  It’s always 100% free and packed full of option trading ideas you can use immediately in your own portfolio.  Click here to subscribe for free.

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.