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Netflix (NFLX) reports its Q1 earnings after the market closes today April 18 (tax day). NFLX stock is wavering, down to $331.23 per share and its put option premiums are rising. Astute investors are taking of this by shorting its put options as an income play.
Fears about its subscriber levels, and whether they will still show growth are pushing up put prices. As a result, income-oriented investors are shorting out-of-the-money (OTM) near-term puts with very short expiration periods in order to create extraordinarily high income.
For example, the May 12 expiration, 24 days from now, shows that the $290 strike price puts have had a huge increase in income. This strike price is over 12.4% below today's price, so NFLX stock would have to seriously tumble.
Nevertheless, these puts trade at $4.53 per put option contract. That represents a 1.56% income opportunity (i.e., $4.53/$290.00). And even if the stock falls, the investor has a breakeven price of $285.47 (i.e., $290-$4.53), which is 13.8% below today's price of $331.75.
In fact, as you can see, investors can make $6.83 at the $300 strike price. This provides an extraordinarily high yield-to-strike price income of 2.27% (i.e., $6.83/$300) with just a little over 3 weeks to expiration. That represents an annualized return of 34% since there are 15 periods of 24 days in a full year.
Moreover, investors might even want to take on more risk with a closer expiration period, if they believe the subscriber fears at Netflix are overblown. For example, the
April 28 expiration option chain, which is 10 days from now, shows that the $310 strike price is at $7.27 per contract, providing a 2.3% yield for just 10 days. Moreover, the breakeven price is $302.72, or 8.6% below today's price.
Similarly, the $307.50 strike price has a $6.58 premium or a yield-to-strike of 2.14%. That is an excellent return, especially given that the breakeven is close to $300, i.e., $307.50-$6.58 = $300.92. That represents 9.2% downside protection before the put could be exercised.
Keep in mind that these shorter-term put yields have huge annualized returns. For example, if the $310 yield-to-strike of 2.3% can be repeated every 10 days, the annualized return is 83.85% (i.e., 2.3% x 36.5, since there are 36.5 periods of 10 days in a year). The $307.50 yield-to-strike of 2.14% has an annualized return of 78.1. Given how close this is to the 83.85% return of the $310 strike price, and given its higher downside protection, the $307.50 strike price looks very attractive to investors.
The bottom line is that investors are taking advantage today of the fears about Netflix subscriber levels. If you believe that these fears are likely overblown, these puts are a great way to pick up extra high income.
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.
