NFLX (~$220) surged almost 8% yesterday due to Excitement centered around a WSJ report that the company is close a $100 million deal to distribute an original television series starring…..drumbeat please….Kevin Spacey. Give me a break, $100 million deal for 26 episodes that are supposedly gonna compete with HBO’s line up. Not sure this a great reason to buy the stock and like most pieces of news about the company it seems like a good reason to short the stock…….but that has proven to be disastrous for one’s net worth….
The NFLX experiment, in my view can only end in one of 2 ways;
-1st the company gets taken out at all time highs for a ridiculous multiple and absorbed into some behemoth and the contrarians who loved to lose money shorting it will have to move on to the next silly story…….(may i suggest PCLN?)………
-2nd the bear case finally plays out and investors come to their senses that the valuation and market cap make no sense given the competition that continues to nip at their heels and a whole host of other issues.
MAKE NO MISTAKE ABOUT IT……I wouldn’t short this stock with your money, it is very likely int he near term to make a new all time high as the street has become fairly mixed on the name, would prefer that they are all still raging bulls like Goldman who just raised their 12 month price target to $300. But for now there are 10 buys, 12 holds, and 5 sells…..additionally the short interest remains high at a little more than 20% of the float…….
EXPRESS BEARISH VIEWS WITH CALENDAR PUT SPREADS—-DEFINE YOUR RISK AND PLAY FOR THE BIG MOVE.–Outright Put Purchases are super expensive as you might expect in a name like this.
TRADE: BUY the APR / JUN 185 Put Spread for ~7.00
– SELL 1 APR 185 Put at 2.30 and
-BUY 1 Jun 185 Put for 9.30
Break-Evens on APR and JUN Expiration:
APR EXP: if stock is above 185 you collect the premium on the APR 185 put and you own the Jun 185 Put…..if stock below 185 you are essentially long the stock but you are covered as you still own the JUN 185 Put so your loses are locked in at the premium you paid for the spread.
JUN EXP: again if stock was above 185 on APR exp then you own the JUN PUT outright and now you may want to consider turning into a Put Spread by selling a lower strike Put against it to off-set some of the decay.
RATIONALE: Volatility is obviously up across the board shorter dated and i think there is a near-term opportunity to look at Calendar spreads to take advantage of the change in term structure. In this instance the difference in vols isn’t that dramatic as JUN will capture NFLX’s earnings report which will always have a higher vol associated with it than a month that doesn’t capture such an event. APR volatility is about 6 points rich to the 30 day realized which is part of my justification for the structure….