Netflix options traders turn bullish before earnings

Netflix is heading into its Thursday earnings report with options traders positioning for a rebound after a rough stretch for the stock. For everyday investors, the setup matters because options prices show how much volatility the market is bracing for, even though they do not predict the direction of the next move.

The stock has been in a year-long bear market, is down almost 20% year to date, and has sold off after each of its last four earnings reports, according to CNBC. A bear market means a sustained decline of 20% or more from a recent high, and earnings reports often act as reset points for investor expectations.

Options activity has turned more upbeat in recent sessions. Call volume was twice as high as put volume on both Friday and Monday, and by midday Monday nearly three times as many calls had been bought as puts, according to ThinkOrSwim data cited by CNBC. A call option gives the buyer the right to purchase a stock at a set price, while a put gives the buyer the right to sell at a set price.

Traders were also active in selling at-the-money puts, meaning puts with strike prices near the current stock price. Selling a put can be a bullish or income-focused trade because the seller collects premium upfront, but it also creates risk if the stock falls below the strike price.

Technical levels are back in focus

Netflix was trading around $75, roughly where it stood in February when the company ended its pursuit of Warner Brothers Discovery, CNBC reported. That level also has history: in late 2021, Netflix traded near the same area before falling about 80%, then recovering over multiple years to a peak of $134 in June last year.

Todd Gordon, founder and chief investment officer at Inside Edge Capital, told CNBC by email that Netflix is testing its rising 200-week moving average and the $70 area, which he described as a former resistance level from late 2021 that later became support. A moving average smooths out price action over a period of time, and traders often watch it as a rough gauge of trend.

Options pricing implies a 7.6% move after earnings, compared with an average realized move of 7.4% over the past year, according to Cboe LiveVol data cited by CNBC. The implied move is the size of the swing options traders are pricing in, regardless of whether the stock rises or falls.

Engagement remains a question

The bullish options tone comes with a clear caveat: some media watchers have pointed to weaker engagement signals. Netflix has not had a major breakout hit in the latest quarter, and Nielsen data showed the company’s share of TV viewership reached its lowest level in more than a year, according to CNBC.

Rich Greenfield, co-founder and TMT analyst at LightShed Partners, told CNBC by text that Netflix has lacked a breakout hit this year. He said Nielsen data shows U.S. engagement is growing, but viewership per subscriber is down modestly as subscriber growth continues. Greenfield also said newer ad-supported users may watch less than older ad-free users, with rising competition also playing a role.

Monday’s busiest contract by volume was the $75 put expiring Friday, according to SpotGamma data cited by CNBC. One large trader sold 500 of those puts and collected just under $150,000. SpotGamma data showed roughly 20,000 transactions in that contract Monday, with about 15,000 likely sales.

That kind of trade suggests some traders are willing to take the other side of downside protection into the earnings event. It does not remove the risk: Netflix has a recent pattern of post-earnings declines, and options markets are still pricing in a move close to the stock’s one-year average.

This story draws on original reporting from CNBC.