Netflix Stock Is Up From Its Lows, But Its Put Option Premiums are Still High - Short Them

Netflix (NFLX) stock took a hit after peaking at over $691 in early July and it's now down to $630. NFLX is up from recent lows, but its put option prices are still high. This is ideal for short sellers as an income play.

In midday trading on Friday, Aug. 9, NFLX stock is at $632.09, up from a recent low of $598.55 on Aug. 5. 

I discussed the stock's value in a July 19 Barchart article, “Is Netflix Fully Valued Here? Its FCF Performance May Imply This - But Maybe Not.” I showed how NFLX stock could still be worth $714 per share, or over 13% higher than today's price. 

This was based on its strong free cash flow (FCF) and FCF margins and analysts' revenue forecasts for 2025.

Moreover, analysts have much higher price targets, as AnaChart shows in its survey of top analysts covering the stock. The average of 35 analysts is $666.77, and I showed that sell-side analysts with high Price Targets Met Ratios (i.e., an AnaChart metric showing who has good track records) have price targets well over $700 per share.

One way to play this now is to sell short out-of-the-money (OTM) put options.

Shorting OTM Puts in NFLX Stock

The August 30 expiration period, which is 3 weeks away, has attractive premiums for short-sellers of OTM put option strike prices. For example, the $610 strike price, about 3% below today's price, has a premium of $10.05. That represents a 1.6475% immediate yield to the short seller of these nearby expiry puts (i.e., $10.05/$610).

Moreover, the $600 strike price, 4.5% below today's spot price, has an attractive premium of $7.50 for more risk-averse investors. That represents an immediate yield of 1.25% (i.e., $7.50/$600) to sellers of these puts.

NFLX put expiring Aug 30 - Barchart - As of Aug. 9 before the close

This is especially attractive to existing investors. For example, not only will they gain any upside in NFLX stock if it rises, but they also get to keep the income.

Downside Risk

Moreover, the breakeven prices are attractive. For example, NFLX stock would have to fall below $592.50, before investors shorting the $600 strike would lose any money. That is 6.30% below today's price (i.e., $600-$7.50 = $592.50, and $592.50/$632.35-1 = -6.30%).

In other words, the stock would have to tank again before short-put investors even begin to lose money. And remember, for short-sellers of put options, the only obligation is to buy the stock at the strike price shorted. 

In other words, the worst that can happen is that you buy more shares at a lower stock price. This makes sense as I have shown that NFLX stock is undervalued.

For example, the investor could sell covered calls to gain extra income. That could help alleviate unrealized capital losses from buying more shares below a lower NFLX stock price. Long investors who already own the stock can keep the short-put income. That will improve any unrealized losses from the stock's recent weakness.

The bottom line is that NFLX stock looks cheap here. One way to profitably play this is to sell short out-of-the-money put options, and buy NFLX for the long term.

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. For more information please view the Barchart Disclosure Policy here.