Netflix Inc (NASDAQ: NFLX) shares tanked towards the end of this week as some negative headlines have rattled investors. Some large option traders were aggressively dumping Netflix calls on Friday as investors begin to focus on the launch of the Walt Disney Co (NYSE: DIS) streaming service in November.
On Friday morning, Benzinga Pro subscribers received 11 option alerts related to unusually large Netflix trades. Among the most noteworthy of the trades was a series of six large orders executed between 10:02 a.m. and 10:04 a.m.
Over a series of four trades, a trader sold 2,797 Netflix call options with a $285 strike price expiring on Oct. 15 near the bid prices of between $8.632 and $9.286.
Mixed between those four trades were another two trades representing a total of 1,688 additional $285 Oct. 15 calls that changed hands at prices near the midpoint of the bid-ask spread.
While trades at the midpoint are typically considered neutral, these trades are more bearish in nature given that they likely were executed by the same trader selling near the bid. Looking at the series of six trades that took place within a two-minute stretch, each trade was executed at a lower price than the last, suggesting even the trades that took place at the midpoint likely represented the same trader attempting to exit a large position.
Assuming all six trades were sales, the six trades represented a total sale of 4,485 Netflix call options, or a total bearish bet worth nearly $4 million that Netflix shares will be trading below $291.60 this time next month.
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 six large trades were executed within two minutes of each other all in Oct. 15 Netflix calls, they could easily have represented institutional hedges.
Tough Times Ahead?
Netflix suffered on a string of negative headlines this week suggesting the company’s disappointing second quarter earnings could carry over to the second half of 2019.
In an interview with Variety, Netflix CEO Reed Hastings admitted that the dynamic of the streaming video market is about to shift with the launch of new services by Disney and Apple, Inc. (NASDAQ: AAPL).
Hasting’s comments come after Evercore ISI suggested recent Netflix data checks have been soft, putting third-quarter subscriber growth targets in jeopardy. In addition, Bernstein analysts said this week that “taking the lower of: a) current multiple (33x EBITDA), or b) 2 std deviations below average (4.5x Sales), decreasing our EBITDA forecast by 10%, the theoretical ‘floor’ for NFLX would be $230.”
While there were also four large bullish Netflix put sales on Friday morning as well, the series of call trades stood out the most because they were almost certainly coming from the same seller.
The good news for Netflix bulls is that those calls were so far out-of-the-money at the stock’s current share price that the seller may not be betting on additional downside from here. Instead, they may simply believe there is no longer enough time for Netflix to get back up above $290 by the time the Oct. 15 calls expire in less than a month.
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