Fast money swarms in to the House of Hastings
10/06/17

Patience may be a virtue, but some options traders aren’t hearing it.

After all, equity derivatives offer all kinds of target dates. Many expire months or even years in the future, letting investors position for upside or downside in securities from one season to the next. Why rush when you can take your time?

Try asking that to traders in Netflix (NASDAQ: NFLX), which yesterday saw a sharp volume spike in its shortest-term calls expiring this very afternoon. Here’s a rundown of the activity:

  • 6-October 190 calls: Buyers went to work less than two minutes after the opening bell, paying $0.25 to $0.45. They kept at it as the shares advanced and premiums rose as high as $4.65. Almost 14,000 contracts changed hands when it was all said and done.
  • 6-October 192.50 calls: Buyers paid as little as $0.12 early and as much as $2.70 by the afternoon. Volume neared 13,000 contracts.
  • 6-October 187.50 calls: These changed hands over 9,000 times. They initially fetched $0.80 but shot up to $7 as NFLX streamed higher. 

Wow, those are some pretty major swings in price! What’s going on? Well, calls fix the price where a security can be purchased. Their cost can be very low relative to the underlying stock, which explains the kind of extreme leverage at work on Thursday. They can also go worthless if no rally occurs.

NFLX ended the session up 5.39 percent to $194.39, basking in a glow of enthusiasm after announcing price increases for some of its video packages.1 That was the latest in a string of positive headlines that include giddy analyst calls and a widening embrace of its services both home and abroad.2 “Yep, it can keep running,” Wall Street bulls seemed to imply by raising price targets.3  “Stranger things have happened. This is no house of cards.”

Netflix (NFLX) 4/10/17 - 10/5/17 chart

Source: OptionsHouse by E*TRADE.

There may not be 13 reasons why market veterans love the stock, but here are three: 

For one, NFLX wears the crown among members of the tech sector's vaunted FANG stocks for being the only one at a new 52-week high. Others like Facebook (NASDAQ: FB), Amazon.com (NASDAQ: AMZN), and Alphabet (NASDAQ: GOOGL) have drifted recently.

Secondly, the next earnings report isn’t due until October 16, after most of the options traded yesterday expire. That suggests traders are looking for momentum before the release. (The last set of numbers, by the way, blew past estimates but then the shares pulled back before bouncing at their 50-day moving average.) 

Third, could CEO Reed Hastings be following a path blazed by AMZN founder Jeff Bezos by cementing customer loyalty and then raising prices to please margin-wary investors? 

Bottom line: NFLX broke into new territory yesterday, and options traders were tuned in for more upside in the very near term.

 

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1. Reuters: Netflix increases monthly subscription fees for two plans. 10/5/17.

2. Barron's: Watching Netflix: Look At Those Subscriptions Rise! 10/4/17. Moneyish: These companies are now offering free Netflix, Hulu, Spotify and more. 9/11/17. Benzinga: Analyst: Netflix Losing Disney Doesn't Matter Because Most Markets Never Had Disney Content In The First Place. 8/30/17. 

3. Benzinga: 5 Biggest Price Target Changes For Wednesday. 10/4/17.