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Netflix Inc (NFLX) stock still looks undervalued based on its strong free cash flow (FCF) and FCF margins. My prior article shows that it could be worth over 15% more. However, to set a lower buy-in price, investors can short out-of-the-money puts and buy long-dated in-the-money (ITM) calls known as LEAPs (long-term anticipation securities).
NFLX is at $843.97 in midday trading on Monday, Nov. 18. In my last two Barchart articles on Oct 20 and 21, I set a $940 price target and said it could be worth as much as $975.
The Oct. 20 article, “Netflix Stock Looks Cheap to Value Investors Based on Its Huge Free Cash Flow,” showed that Netflix's free cash flow (FCF) hit 22.3% of sales in Q3 and a 19.3% YTD margin.
Higher Price Target Based on Higher Sales Forecast
Moreover, since then, analysts have raised their 2025 revenue estimates from $43.65 billion to $43.72 billion. Therefore, if Netflix manages to make 20% of sales in FCF next year, it could generate $8.744 billion in free cash flow.
This implies that the stock could be worth much more. For example, using a 2.0% FCF yield metric, its market could be $437.2 billion (i.e., $8.744b / 0.02 = $437.2b), which is 21.3% higher than today's market cap of $360.14 billion.
In other words, NFLX stock could be worth 21.3% more than today's price or $1,023 per share (i.e., $844 x 1.213).
One way investors can play this is to short out-of-the-money (OTM) put options. That way the investor can gain extra income while waiting for NFLX to fall to a lower buy-in price.
Shorting OTM Puts
I discussed this strategy in my Oct. 21 article, “Shorting Netflix Out-of-the-Money Puts Here Is a Good Buy-In Strategy.” At the time NFLX was at $763.54 and I suggested shorting the $725 put strike price options expiring this Friday, Nov. 22, i.e., 32 days away. The bid price for these puts was $8.85, so the investor gained an immediate 1.234% yield (i.e., $8.95/725).
Today, those puts are trading for just 21 cents on the ask side, so this investor has made most of this income. So, it makes sense to roll these over (i.e., enter an order to "Buy to Close) and short a new further-out expiration period at a higher strike price.
That way the investor can set a new lower out-of-the-money (OTM) buy-in target price and still get paid while waiting. Remember that without owning the underlying NFLX stock the investor could miss out on any upside. This is why I usually suggest buying the underlying or else buying LEAPS (long-dated in-the-money calls - over one year out in expiration and for an in-the-money strike call price).
For example, look at the Dec. 20 expiry period, 32 days away, where the $820 puts trade for $13.00 on the bid side. This is 2.70% below today's price. So, the investor can make an immediate short-put yield of 1.585% (i.e., $13/$820).
Moreover, it makes sense to buy long-dated in-the-money (ITM) calls, and use this short-put income to help defray some of that call option cost.
For example, look at the Jan. 16, 2026 call expiry period, 424 days from now (i.e., 1 year and 2 months away). It shows that the same $820 strike price (this time on the call side), which is in-the-money (ITM) by 2.75%, has a premium of about $153 in the mid-price.
Therefore, the investor can essentially buy a net long position of 100 shares in NFLX for $140 (i.e., $153-$13), instead of having to pay $842 today. This means the investor only has to shell out $14,000 ($140 x 100) for an equivalent 100-share position vs. $82,000 (i.e. $842 x 100). That is just 16.6% of the market price, essentially giving the investor a 6x leveraged position (i.e., $842/$140 =6.0)
Moreover, note that the investor has good delta ratios in each position. The short-put play shows a negative delta of 32 or about a 32 percent chance of having to buy the stock at $820. The ITM call play, which is conservative since it provides downside protection by being in-the-money with $22 of intrinsic value, has a 65.5% chance of staying in-the-money.
In addition, note that over the next year, while waiting for NFLX stock to hit the $1023 price target, the investor can keep shorting OTM puts. This effectively reduces the net buy-in cost for the investor over time.
For example, let's say that each month for 13 months the investor can effectively gain $11 in OTM put income. That produces $143 in income, which, when combined with this month's $13 short-put income produces $156 total premiums. That more than covers the $153 in call option price tag (i.e., $156 put income over 14 months - $153 call price).
In other words, the investor could end up with very little risk with this play, assuming the put yield income stays high each month. The bottom line is that this is a great way to play NFLX stock while waiting for it to hit the higher price target.
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