Netflix Puts Worth Shorting Here For High One-Month Yields

Netflix Inc. (NFLX) stock has been moving higher after a post-earnings dip. Moreover, even if NFLX takes a breather here or trades in a range, it may be worth shorting out-of-the-money puts to set a lower buy-in price.

NFLX closed at $81.72 on Friday, Aug. 28, up 2.35%. In the last month, it's risen over 20% since bottoming out at $67.60 on July 20. However, NFLX is still where it was almost 3 months ago, when it closed at $81.52 on June 3.

NFLX - last 3 months - Barchart - Aug. 28

Past Plays

But it could be worth much more, based on analysts' price targets. Moreover, if it's stuck in a range, it makes sense to short out-of-the-money puts every month.

I discussed these points in two articles over the past two months: “Netflix Tanks on Lower Margins and Flat Outlook - Time to Buy NFLX?” (July 19), and “Netflix Looks Attractive to Short-Put Players - a 2.0% One Month Income Yield” (Aug. 7).

I suggested shorting the $65 and $70 put strike prices for income gains of $1.28 and $1.44, respectively. That resulted in short-put yields of 1.97% and 2.06% for two and three weeks, respectively.

It could be time to repeat this play, even if NFLX's rise falters from here.

Price Targets Are Still Higher

Yahoo! Finance's survey of 51 analysts is $93.66, Barchart's mean survey price target (PT) is $95.52, and AnaChart's is $108.38. The average of these is $99.19. 

My midpoint prior price target, based on FCF analysis, was $81.45, although my upper price was $85.70. Combining this with the analyst survey PTs leads to an average PT of $95.82.

That's over 17% higher than Friday's close. So, there is still good upside potential.

But we all know that after a stock runup, profit-taking occurs. That may mean it's better to short out-of-the-money (OTM) puts to set a lower buy-in point.

Shorting Cash-Secured OTM NFLX Puts

For example, the Oct. 2 expiration option chain, 32 days away, shows that the $78.00 strike price put option has a midpoint premium of $1.40. That's close to the prior play.

NLFX puts expiring Oct. 2 - Barchart - As of Aug. 28

It means that an investor who posts $7,800 in collateral can enter an order to “Sell to Open” 1 put and immediately earn $140. That represents a one-month yield of 1.8%:

  $140/$7,800 = 0.01795 = 1.795% 

However, just to be conservative, it makes sense to also short the $77.00 put. That has a short-put yield of 1.455% (i.e., $1.12/$77.00), but the delta ratio is lower, implying less risk of assignment.

So, doing both trades, the investor makes $252 on $15,500 in collateral, or 1.626% over the next month. However, the delta ratio is lower at about a 25% chance of NFLX dropping to $77.50 over the next month.

Note also that the potential buy-in point is much lower: $77.50 - $2.52 = $74.98, or 8.3% below Friday's close.

Conclusion

If Netflix stock stays in a range over the next six months, an investor can potentially make almost 10% by repeating this play (i.e., 1.626% x 6 = 9.756%). Moreover, the annual expected return (ER) is 19.5%. This assumes an investor can earn 1.626% each month shorting cash-secured OTM puts.

Note that this is higher than the 17% ER holding NLFX shares, using the price target average shown above. Moreover, even if NFLX drops, the investor has a lower buy-in. That means the expected return is higher than 17% for the short-put investor.

The bottom line is that shorting Netflix puts consistently might be a better long-term play, especially if NFLX stays in a trading range.