Oh, we are definitely going to Netflix and chill here folks.
Everyone’s favorite digital streaming service has exploded over the last few years and is constantly the talk of the town on Wall Street. Investors who have stuck with the company have been greatly rewarded for doing so and as the stock continues to rise, more and more people come out and bet again it.
We love stocks like this where there are strong opinions on both sides. That means that the ebbs and flows in Netflix are larger than other stocks. Like always, we prefer to trade NFLX options over Netflix stock.
For starters, if we turn on CNBC or open our weekend Barron’s, we will undoubtedly hear or read something about Netflix. This, rightfully so, brings a lot of attention to Netflix. And whenever there is more attention paid to a stock, there is more liquidity, thus fairer and more practical markets for us to trade. And we love it!
Netflix is one of the FANG stocks and is no doubt a beast…
as it has more than doubled in the last three years. Unbelievable and congratulations to any shareholders of this stock.
But while the stock is nice and pretty, we do not trade stock by itself ever and we must make sure the options markets are practical and liquid enough for us to trade without being ripped off. Let’s see how the NFLX options are!
How Good are the NFLX Options?
In order to tell is the NFLX options are good or not, we must see their level of liquidity. Let’s look at overall volume.
These are big boy numbers especially when we consider that Netflix is currently trading for $140.89 a share. Combined in the options market, Netflix traded a grand total of $1,036,260,039.
Some of you might be wondering how we calculate that. It’s simple!
We take the stock price of $140.89 and multiply it by 100. Why do we multiply it by 100? Because every option is worth 100 shares of stock. So we now get $14089 and we multiply that by how many contracts traded for the day or in this case 73,551. And what do we come up with? $1,036,260,039.
Over a billion dollars traded on the options market means there are some big players who are holding the stock and are using the options market to hedge their positions. How else might we know there is institutional interest? We can look at some of the largest NFLX options trades for the day and see how big they are.
|Option||Buy or Sell||Quantity||Price||Cost|
|17 Mar 17 141 Put||Sell||750||$1.51||$113,250|
|18 Jan 19 125 Put||Buy||400||$18.35||$734,000|
|7 Apr 17 150 Call||Sell||240||$0.64||$16,000|
|17 Mar 17 141 Put||Buy||225||$1.58||$35,775|
|17 Mar 17 142 Call||Sell||191||$1.10||$21,010|
For single trades these are very large and are a clear sign that the insitutions are involved in Netflix.
But great volume and trade size is not enough. We must have liquid markets with tight bid/ask spreads. For starters…do we have weekly options?
You bet we do. And since it has weekly options, it is a total gem to trade in and around earnings season.
But what about the markets!
We have nice single point strikes with thousands of contracts traded with thousands of open interest. While the bid/ask spreads in Netflix are slightly larger than we have seen with some of our other in-depth look into options markets, they are still more than acceptable as we can get filled no more than one penny from midprice. But there may be a reason for this…
Is There a Catch with NFLX Options?
Yes…there is a catch.
Right now, the one day expected move in the S&P 500 (even in this incredibly low volatility period) is about .56% per day. Very tiny. However, in this same low volatility environment, NFLX has a 1 day expected move of 2%.
But what does this mean?
This means that NFLX options are a premium sellers dream as options premiums are typically very inflated in order to price in the larger expected moves. That is why we recommend only selling options in Netflix as opposed to buying them.
What Do We Think?
We think NFLX options are absolutely great! They have
- A ton of volume
- A ton of liquidity
- A ton of open interest
- A ton of strike prices
- A ton of expirations
- Strong but not amazing bid/ask spreads
However, because Netflix has a larger than average expected move, we would like to only be sellers of Netflix premium as opposed to being a buyer. And this is more than doable as the options in Netflix are more than accommodating for anyone that wants to make any type of trade for any size.
Please instantly add Netflix to your watch list.