Netflix (NFLX) has been a monster winner in 2018, having gained 43% year-to-date. That said, the stock has been under heavy pressure since the company reported earnings in mid-October, having fallen from a high of 380 to a low of 250 in late November. So how would I play Netflix stock with options to target a return to new highs, or conversely a major stock decline? I have a couple of ideas for Netflix options trades below.
But first, here are some of the bull and bear cases for Netflix.
What Wall Street Thinks of Netflix Stock
Following the company’s impressive earnings report in October the analyst community was largely bullish on NFLX stock, though there were some naysayers. Here are a few samples of some research notes that caught my attention:
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MKM Partners: “The company still has room for significant market cap expansion over the next several years. We think this has increasingly become a consensus view among investors. As such, we think the stock will see limited friction to new highs.”
Raymond James’ Justin Patterson raised his price target to $435, up from $400. He wrote: “We continue to view the breadth of the 2019 content slate as a positive for net adds, and believe Street subscriber estimates ultimately have to trend higher. We believe the reasons to be skeptical of Netflix are weakening.”
UBS set a $400 price target—with a Neutral rating on the stock—up from $365. “We were most constructive on domestic trends. Clearly signs of any domestic maturation are still not showing in results.”
Bank of America Merrill Lynch set a $440 target on the stock, up from $410, saying Netflix “has alleviated investor concerns around its growth trajectory,”
On the bear side, an analyst from MoffettNathanson, whose $210 price target is approximately $60 below the current stock price, called the shares’ current valuation “hard to justify.”
They continued: “Netflix’s product, delivery and strategy should continue to drive subscribers above forecast for the foreseeable future. [But] the simplicity in which the Street values this equity may be tripped up one day by real world factors like lower than expected operating margin, lower pricing power and minimal cash flow.”
And the major pushback on NFLX stock is almost always about valuation. According to CNBC, “NFLX is currently valued much higher than other media companies. Despite a share pullback in recent months, Netflix has a trailing price-to-earnings ratio of more than 100 and an enterprise value-to-EBITDA ratio of about 70. For comparison, Disney (DIS) has a P/E ratio of about 14 and an EV-to-EBITDA ratio of about 11. Viacom’s (VIAB) valuation ratios are both around 7.”
Two Netflix Options Trades
So with NFLX trading around 270, how might I bet on, or against, NFLX stock trading options?
If I believed in Reed Hastings, the company’s CEO, and the future of Netflix, I might execute the following trade:
Buy to Open the NFLX March 300 Calls for $18.
The most you can lose on this Netflix options trade is $1,800 per call purchased, if NFLX stock were to close below 300 on March 15, 2019.
However, this trade has unlimited upside potential, just like a stock purchase, but at a fraction of the cost ($1,800 vs. $27,500).
If I wanted to bet against NFLX stock, I might execute the following trade:
Buy to Open the NFLX March 260 Puts for $20.
The most you can lose on this Netflix options trade is $2,000 per put purchased, if NFLX were to close above 260 on March 15, 2019.
The advantage to buying put options is that most brokerage companies don’t allow average investors to short stocks. However, they do all allow you to buy puts, which is a bearish position, because your potential loss is limited to the price you paid for the put ($2,000).
Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.Learn More