Name That Trade – NFLX edition

by Enis August 23, 2012 1:06 pm • Commentary

I had a good conversation with a reader about NFLX this weekend.  The reader mentioned a few interesting reasons for his short bias on NFLX, including:

  • Showing relative weakness even as the broader market pushes higher
  • Potential big push by AAPL in the next 6 months to enter the TV / streaming market
  • NFLX is overly exposed to competition given its existing expensive content deals.  The content providers know that NFLX is in a position of weakness, which might make AAPL a more attractive alternative

We discussed potential short-biased options ideas on the back of his thesis.  But when I looked at NFLX options, there were not many trades that stood out to offer great risk / reward.  Neither the reader nor I executed any trades.  But I figured it would be a good discussion to walk through my thoughts when looking at the options market.

First, taking a quick glance at the calls on the left side shows that selling call spreads doesn’t line up well.  Selling the Sept 67.5 / 72.5 call spread for example only nets 1.25 in premium, so you’re making 1.25, but risking 3.75, on a 30% short interest name that can squeeze.

Looking at the puts on the right hand side, the put spreads don’t line up great either.  The 62.5 / 57.5 put spread costs 1.50, the 62.5 / 55 put spread costs 1.85, neither of which is great risk / reward.  The 60 / 55 for about 1.00 looks ok, but you need almost a 20% move in the next month for your max gain.

Looking at October expiry now:

Again, implied volatility is not high enough to justify selling call spreads.  On the put side, the  put spreads don’t offer great payouts again.  However, I would prefer Oct put spreads to Sept put spreads on a relative basis because it doubles the time to expiry, and the lower strikes have more premium.  So the Oct 60 / 50 put spread for 2.35 is a decent proposition, but still quite expensive overall, so nothing doing.

I checked the farther out months, Dec12 and Jan13 expiries, and the volatility is more expensive because those expiries catch the next earnings report, but nothing seemed like a home run there either.  In the end, nothing to do.  Fortunately, there are thousands of stocks out there, so no need to force a trade where there isn’t one.