Netflix options trade targets cheaper valuation, Michael Khouw says
Michael Khouw says Netflix’s lower valuation and ad growth set up a defined-risk options trade as shares hover near $70.
By Dev Ramirez · Crypto Correspondent
· 3 min read
Netflix options trade ideas are getting attention after CNBC Options Action trader Michael Khouw argued the stock’s valuation has fallen faster than the company’s business has weakened. For everyday investors, the point is straightforward: Netflix is being discussed less as a high-growth subscriber story and more as a cash-generating media business with a possible advertising runway.
Khouw said Netflix is trading at 18.9 times forward earnings, a valuation based on expected future profits. That is above the stock’s 2022 bear-market low of less than 15 times, but he said the business now has better margins and stronger cash generation than it did then.
Netflix shares were quoted by CNBC at $71.03, up 94 cents, or 1.34%, around 2:07 p.m. EDT. Khouw framed the options setup with the stock near $70 and 25 calendar days left until August expiration.
What is the Netflix options trade?
Khouw described an August 65/78/88 “covered strangle,” a multi-leg options strategy designed to collect premium while setting limits on part of the risk. In plain English, the trade sells one downside option and one upside option, then buys another upside option farther away to cap the loss if the stock rises sharply.
- Sell the August 65 put.
- Sell the August 78 call.
- Buy the August 88 call as protection against a larger upside move.
- Collect a net credit of $1.10, which Khouw said equals about a 1.5% return over 25 days, or more than 20% on an annualized basis.
According to Khouw, the trade’s profitable range runs from $63.90 to $79.10. That bracket allows for about 9% downside from the stock level he used and about 13% upside.
The trade still carries risk. Khouw said the upside risk is capped at 10 points by owning the August 88 call. On the downside, if the stock falls below $65 and the put is assigned, the effective entry price would be $63.90, which he said works out to about 17 times forward earnings.
Why Khouw says Netflix’s valuation looks different now
Khouw’s case starts with how investors have changed the way they look at Netflix. He said the company’s move away from emphasizing subscriber additions and toward revenue, margins and free cash flow caused some growth-focused investors to step back. At the same time, he said value investors have been slower to embrace the stock because companies such as Disney trade below 13 times forward earnings.
Khouw argued that comparison misses parts of Netflix’s business model. He pointed to Netflix’s roughly 325 million paying members and said that scale gives advertisers a broad connected-TV audience. He also said Netflix’s ad business is expected to generate about $3 billion this year and could reach $10 billion by 2030.
He also highlighted capital discipline, saying Netflix management is buying back stock rather than paying up for older studio assets. Khouw said generative artificial intelligence could help the company by lowering costs tied to production, dubbing and localization, which would matter because content amortization is a major expense for Netflix.
Engagement is another part of the argument. Khouw said live sports, event programming and AI-driven personalization are aimed at stabilizing viewing time and supporting pricing power.
Khouw’s conclusion was that selling volatility looked more attractive than buying Netflix shares outright under the setup he outlined. That is his trading view, not a guarantee of outcome, and options strategies can lose money if the stock moves outside the expected range.
This story draws on original reporting from CNBC.
