Netflix is Still Cheap Here - Shorting Out-of-the-Money Puts Works Well

NFLX

Netflix, Inc. (NFLX) completed a 10-for-1 stock split as of Nov. 17, reducing the price from over $1,100 to $107.58 as of Friday, Nov. 28. That makes it much easier to sell short out-of-the-money (OTM) put options for income.

As a result, less collateral is required to sell short one put contract. Moreover, it makes it easier to set a lower potential buy-in point. This article will show why.

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Higher Values for NFLX Stock

Netflix is still worth significantly more than its present price. I discussed this in my Oct. 24 Barchart article, “Netflix Produces Strong FCF Q3 Margins - NFLX Looks 23% Too Cheap.”

At the time, NFLX was at $1,113.59 (or $113.36 post-split), and I showed that, based on its strong free cash flow (FCF), Netflix was worth $137.40 per share.

That is still +27.7% higher than today's price.

Moreover, analysts still see good upside in NFLX stock. For example, 49 analysts surveyed by Yahoo! Finance have an average price target of $134.44.

And Barchart's mean survey price is $136.68 per share.

This underlines the potential upside in NFLX stock.

One way to play this is to set a lower buy-in price by shorting out-of-the-money put options. I discussed this in my last article.

Shorting OTM Puts

On Oct. 24, I recommended selling short the $106.50 (post-split) put option that was to expire on Friday, Nov. 28. The premium received from doing this was $1.863 for a one-month short play. The strike price was about 4% or so below the trading price.

That means that the investor made a one-month yield of 1.75% (i.e., $1.863/$106.50),. That was in return for an obligation to buy 100 shares if NFLX fell to $106.50 on or before Nov. 28.

Since NFLX closed at $107.58, it remained out-of-the-money (OTM). So, the investor's collateral was not used to buy 100 shares.

At the time, that would have required securing $106,500 ( i.e., $1065 x 100) to earn $1,863 shorting the $1065 put (post split it's $106.50).

But now, it requires 10x less money to short one put. For example, a new short play expiring Dec. 26, 2025, 27 days from now, at the $106.50 strike price only requires $10,650 in cash to be secured with the brokerage firm.

This mid-point premium received is $2.79, so the one-month yield is 2.62% (i.e., $2.79/$106.50). However, that strike price is only 1% lower than the trading price.

So, it might make sense to short a further out-of-the-money (OTM) strike price. The $105.00 strike price put has a midpoint premium of $2.18.

That provides an immediate yield of 2.076% (i.e., $2.18/105.00) for one month, but the strike price is 2.40% lower than the trading price.

Moreover, the breakeven point (i.e., $105.00 - $2.18 = $102.82) is 4.42% below Friday's close of $107.58. So, it provides good downside protection.

The bottom line here is that NFLX stock looks cheap. One way to play it is short one-month away puts for a 2.1% yield at a strike price that is 2.40% lower, netting out to a 4.42% lower breakeven point.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com