Large Option Trades Hint At How Institutions Are Playing The Netflix Dip

Netflix, Inc. NFLX shares traded lower by 11% on Thursday after the company reported 2.7 million global net subscriber additions in the second quarter, well short of analyst expectations and company guidance of 5 million.

Now that the market has reacted to the news, traders must decide whether the sell-off is a buying opportunity or the beginning of a longer-term negative trend for Netflix, and some massive options trades on Thursday could reveal how institutions are playing it.

The Trades

On Thursday morning, Benzinga Pro subscribers received four options alerts related to Netflix.

At 10:13 a.m, a trader bought 2,686 Netflix call options at a $350 strike price that expire on Jan. 17, 2020. The calls were purchased at the ask price of $22.697 and represent a nearly $6.1 million bullish bet on Netflix shares at a break-even price of $377.69.

At 10:21 a.m., another trader bought 1,031 Oct. 18 $325 Netflix call options at the ask price of $24.043. The buy represented a bullish bet worth $2.47 million.

A second later, likely the same trader sold 540 of the same Oct. 18 $325 Netflix call options at the bid price of $24.243. The quick trade seems to have netted the trader a $10,800 profit.

Finally, At 10:32 a.m, a trader sold 619 Netflix call options at a $350 strike price that expire on Sept. 20. The calls were sold at the bid price of $7.749 and represent a $479,663 bearish bet on Netflix.

All together, the large trades represented an aggregate bullish bet on Netflix of roughly $6.8 million.

Why It’s Important

Due to the relatively complex nature of the options market, options traders are generally considered to be more sophisticated than the average stock trader. In addition, large options traders are often professional, wealthy individuals or institutions, either of which could have unique insight or information about a company. Even traders that stick exclusively to stocks watch the option market closely for unusual trading activity as an indicator of where the “smart money” is focusing.

Unfortunately, because stock investors often use put options to hedge larger bullish stock positions, there’s no way to be 100% certain whether an option trade is a standalone purchase or a hedge against a stock position.

Given the large size of the trades on Thursday morning and the fact that one quick scalp trade appears to have been executed within a second’s time, there’s a good chance institutions were behind at least three of the trades. Whether these large traders were making bets on a Netflix recovery or hedging a short position is unclear. Given the amount of uncertainty surrounding Netflix’s near-term outlook, it’s understandable why an institutional Netflix bear may want to hedge that bet in the options market.

What's Next

On the surface, Netflix’s subscriber miss certainly seems like a win for bears. However, Netflix has historically bounced back quickly from subscriber misses.

Netflix also exceeded earnings expectations in the quarter, reporting 60 cents in EPS. Netflix also guided for a huge 7 million jump in net subscribers in the third quarter thanks to the release of new seasons of “Stranger Things,” “The Crown” and “Orange Is The New Black.”

Interestingly, the largest of Thursday’s trades was the $6.1 million purchase of calls expiring in January of 2020. That timeframe gives Netflix two additional earnings reports to get back on the right track and seems to assume that the November launch of the Walt Disney Co DIS will not disrupt the longer-term Netflix growth story.

Netflix traded around $322.23 per share at time of publication.

Related Links:

Netflix Short Sellers Up $800M On Subscriber Miss

How To Read And Trade An Options Alert

Photo credit: Matthew Keys, Flickr