Netflix Options Trading Surges 44.8% Amid Bearish Sentiment

Netflix Inc. (NFLX.US) experienced significant activity in its options market last Friday, with a total of 164,872 contracts traded, marking a 44.8% increase from the average daily volume over the past month. Of these, 76,931 were put options, and 87,941 were call options, resulting in a put-call ratio of approximately 0.875. While this ratio suggests a bullish sentiment, it is crucial to consider that options trading involves both buying and selling, necessitating an analysis of the specific transaction directions.

Using the commonly employed tool Barchart's options flow scanner, it was observed that the net trading sentiment leaned towards the bearish side, with transactions amounting to nearly 430 million USD. Specifically, 213.1 million USD worth of call options with a strike price of 1200 USD, expiring on September 19, were sold at a price of 35.95 USD. If Netflix's stock price does not surpass 1235.95 USD (strike price plus option cost) by the expiration date, the seller retains the premium. Conversely, if the price exceeds this threshold, the seller must deliver the stock at the agreed price. This transaction suggests that some traders may be reducing their equity holdings or employing credit strategies to capitalize on stock price fluctuations.

Despite the cautious signals from the options market, Netflix's stock price has declined by nearly 3% since August 18 and has dropped by 10% over the past half-year. However, it has maintained a 79% increase over the past 52 weeks. For companies with strong fundamentals, short-term corrections often present opportunities for a rebound.

Quantitative models indicate that, within a non-parametric statistical framework, Netflix's stock price is expected to naturally fluctuate between 1256.73 and 1318.80 USD over the next 10 weeks. Considering market reversal signals (four buys and six sells over the past 10 weeks, indicating an overall downward trend), the conditional deviation range could drop to 1186.66-1290.10 USD. Notably, volatility may increase around the October 17 expiration date, potentially complicating the trading environment.

Two bullish vertical spread strategies are worth considering in the current market conditions. The first involves a 1242.50/1250 USD spread expiring on September 19. If Netflix's stock price rises by 3.46% to 1250 USD within the next three weeks, the maximum return could reach 150%. The second strategy involves a 1280/1290 USD spread expiring on October 17, which requires a higher initial cost (385 USD) but offers more time for the stock to appreciate, with a potential maximum return of nearly 160%. Both strategies involve selling higher-strike call options to reduce the cost of entry, making them suitable for scenarios where the stock price is expected to rise moderately.

While this options activity does not constitute a strong bullish signal, considering the stock's recent decline and long-term growth potential, it may present a strategic entry point for cautious investors. However, it is essential to be mindful of the potential for increased volatility from late October to early November, which could introduce short-term risks. Therefore, it is advisable to set strict stop-loss levels when executing trades.