Option Trader Makes Massive Bets On Netflix Rebound

Netflix Inc NFLX is down 2.6% in the past week as the potential for slowing growth and rising competition finally seems to be getting investors to take a second look at the stock’s valuation. For the first time in a long time, Netflix is not one of the market’s top performers in 2019, but at least one large trader is making some big option market bets on a Netflix rebound.

The Trades

On Wednesday, Benzinga Pro subscribers received four option alerts related to unusually large Netflix trades. Here are how the trades broke down by type:

• At 12:06 p.m., a trader sold 678 Netflix put options with a $280 strike price expiring on March 20, 2020 near the bid price at $26.351. The trade represented an $1.78 million bullish bet.
• At 12:08 p.m., likely the same trader sold another 551 of the same Netflix put options expiring on ,arch 20, 2020, this time near the bid price at $26.55. The trade represented a $1.46 million bullish bet.
• At 12:15 p.m., again likely the same trader bought 668 Netflix call options with a $370 strike price expiring on March 20, 2020 near the ask price at $9.151. The trade represented an $611,286 bullish bet.
• At 12:24 p.m., a trader sold another 652 Netflix put options, this time with a $220 strike price expiring on March 20, 2020 near the bid price at $8.008. The trade represented an $522,121 bullish bet.

Given each of the four large trades was bullish in nature, the total bullish bet represented about $4.3 million in size. The fact that all four trades also included options expiring far into the future but all with the same March 20 expiration date, it’s extremely likely it was the same trader executing all four trades.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the large sizes of Wednesday’s Netflix options trades, there’s a distinct possibility of institutional hedging.

Recovery Ahead?

Incredibly, Netflix shares are now down 20% in the past six months and the stock is significantly lagging the S&P 500 in 2019. The weakness comes after Netflix reported in July that it added just 2.7 million subscribers in the second quarter, missing consensus analyst expectations by 46%.

At the same time Netflix subscriber growth is showing signs of slowing, Walt Disney Co DIS and other major competitors are launching their own streaming video services. Disney+ is set to launch in November and underprices Netflix’s standard plan by $5 at just $7.99 per month.

Netflix traded around $290.54 per share at time of publication.

Benzinga’s Take

Assuming Wednesday’s trades are not a hedge, they are a clear sign a large trader (likely an institution) is betting Netflix will once again prove its bad quarter was an outlier and not the beginning of a new trend. By dumping puts and buying calls, the trader seems to be switching from the Netflix bear camp to the bull camp. The $370 strike price of the calls purchased suggests more than 30% upside for Netflix shares over the next seven months.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

Large Option Traders Jump Into Activision Blizzard Following 'WoW Classic' Release

How To Read And Trade An Options Alert