Netflix's Stock Rebounds, But Put Option Premiums Remain High
A Short Seller's Opportunity
Netflix Inc. (NFLX) has seen a notable recovery after reaching a high of over $691 earlier in July, with the stock now sitting around $630 after climbing from recent lows. Despite this upward trend, put option premiums for Netflix remain elevated, creating an attractive opportunity for short sellers to generate income.
Recent Price Movements and Valuation Prospects
As of midday on Friday, August 9, Netflix shares were trading at $632.09, rebounding from a low of $598.55 reached on August 5. While the stock has recovered, some believe it has more room to grow. A July 19 article for Barchart explored the idea that Netflix could be worth as much as $714 per share, based on its strong free cash flow (FCF), forecasted FCF margins, and revenue projections through 2025. This target suggests over a 13% increase from the stock’s current price.
Analysts surveyed by AnaChart also hold a bullish outlook on Netflix, with price targets averaging $666.77 among 35 analysts. Some of the more accurate analysts in AnaChart’s Price Targets Met Ratio have even set valuations exceeding $700 per share, indicating strong optimism about Netflix’s future performance.
Opportunity in Selling Out-of-the-Money (OTM) Put Options
Given these positive projections, one potential strategy for investors is to capitalize on the elevated premiums of Netflix’s put options by selling out-of-the-money (OTM) puts.
For example, the August 30 options expiry, just three weeks away, offers attractive premiums for short sellers. The $610 strike price, which is about 3% below the current market value, carries a premium of $10.05. This provides an immediate yield of 1.65% ($10.05 premium / $610 strike price). For more conservative investors, the $600 strike price—4.5% below Netflix’s current price—offers a premium of $7.50, resulting in a yield of 1.25% ($7.50 premium / $600 strike price).
These premiums present a lucrative opportunity for income generation, especially for those who already own Netflix stock. Selling OTM puts allows investors to collect premiums while positioning themselves to benefit if the stock price remains stable or rises. If the stock does not fall below the strike price, the short seller keeps the premium as profit.
Risk Considerations and Breakeven Points
For investors considering this short-selling strategy, the downside risk is mitigated by favorable breakeven points. For example, the breakeven for the $600 strike price is $592.50, meaning Netflix’s stock would need to drop below this level for short sellers to incur losses. This breakeven is about 6.3% lower than the current stock price of $632.35 ($600 strike price - $7.50 premium = $592.50, and $592.50 / $632.35 = -6.30%).
In simpler terms, Netflix’s stock would have to experience a significant decline before put sellers face losses. Even then, the short seller's obligation is simply to purchase Netflix shares at the strike price of the option. For long-term investors who believe in Netflix’s potential, this could be a favorable outcome, as they’d acquire more shares at a lower price.
Additional Income Strategies for Long-Term Holders
Long-term investors who already own Netflix shares can further enhance their positions by selling covered calls in conjunction with selling OTM puts. This strategy allows investors to collect income from the premiums while potentially reducing the impact of short-term price fluctuations. Using covered calls not only generates extra income but also provides additional security in a volatile market.
A Strategic Play for Netflix’s Future
Netflix’s stock is trading at a potentially attractive valuation despite its recent rebound from lower levels. Selling OTM put options presents an opportunity for investors to capitalize on high premiums while limiting downside risk. This strategy not only provides income but also offers the chance to buy Netflix shares at a lower price, aligning with a bullish long-term outlook. Given Netflix’s strong fundamentals and positive analyst predictions, this approach could be a profitable strategy for those seeking both short-term gains and long-term growth.
About the Creator
Donna Lee Hellmann
Just a Gen Xer living in a Gen Z world. I'm a seasoned writer struggling to adapt to technology that changes every 6 months, and fighting to keep my career.
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