Netflix’s earnings report is about to be released into the middle of so much drama that it could easily be turned into an edgy show about the pressures of corporate America, high stakes investing, and political intrigue.
The company, which cemented its place as one of the key content producers and distributors in the world during the ravages of Covid-19, has become a hot stock for investors. Now, the passion of the market mob faces a moment of truth at the same time that major political controversies threaten the stability of the U.S.
Netflix (ticker: NFLX)’s fourth-quarter financial results will also have extraordinary significance for the major technology stocks that have long been primary engines of the stock market’s advance. Investors are torn between sticking with the innovative technology titans that have surged in recent years, while other stocks have shuffled along, or betting on smaller stocks that do well in an economic recovery.
On most days, investors can simply watch what happens in Washington like some show. But now Washington is preparing to do things with fiscal stimulus programs that could seriously alter the trajectory of stocks like Netflix.
After rising about 47% in the previous year, the stock is down about 8% during these incredible early days of 2021. Investors can’t decide if it is better to stick with the so-called FAANG stocks— Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix, and Alphabet (GOOG)—or evolve their approach.
Many investors are wagering on economically-sensitive stocks that could benefit from increased economic stimulus programs and economic conditions that could dramatically improve as the Covid-19 vaccine is administered to more people.
Shawn Quigg, a J.P. Morgan derivatives strategist, recently advised his clients that Netflix’s options are priced in anticipation of fireworks. In a recent note, Quigg noted that the options market is implying an earnings-related move of 7.1% for the stock, compared to a realized average move of 5% and 5.6% over one- and three-year periods.
He recommended that investors sell a straddle—that is a put and call that match the stock price—that expires on Jan. 22. The suggested strategy reflects J.P. Morgan’s fundamental view that Netflix’s earnings report will reveal nothing out of the ordinary, which makes the elevated options premium something to harvest by selling a put and call.
When Quigg structured the straddle, the stock was at $507.79. Selling the January $507.50 put and call that expires Jan. 22 generated a credit of $ 40.50, or roughly 8% of the stock’s price.
If at expiration the stock has declined, investors will be obligated to cover the put and buy Netflix stock for an effective purchase price of $467 (strike price less premium for selling straddle), down 8% from the reference price. If the stock rallies on earnings, investors will be short the stock at $548 (strike price plus premium for selling straddle). Quigg noted that $550 has been a resistance level in the past.
Netflix’s stock price will likely have changed by the time you read this. Consider Quigg’s trade an example of how sophisticated investors think of stocks ahead of critical events. If the trade appeals to you, consider changing the strikes to reflect any changes in the stock price. Should the trade seem unusually aggressive, watch what happens because it will still provide important insights into some of the most critical questions that now face investors about the future trajectory of major technology stocks.
Email: [email protected]
