Option Trade
Netflix, Inc. (NASDAQ:NFLX) Puts
Tuesday, January 19, 2016

**OPTION TRADE: Buy the NFLX Mar 2016 100.000 put (NFLX160318P00100000) at approximately $7.50. Place a pre-determined sell at $15.00.

Note: No protective stop losses added -- but if you wish to do so make it $3.00.

by Ian Harvey

January 19, 2016

Netflix, Inc. (NASDAQ: NFLX), a provider of Internet television network, reports its fourth-quarter results after the market close today, January 19th. Headed into the company's quarterly report, analysts forecast earnings of $0.02 per share. During the same period last year the company earned 10 cents per share.

Netflix was one of the standout stocks of 2015, but so far 2016 has not been as kind. The stock has sold off with the overall market, and shares are currently down 7.7% on the year.

NFLX was recently trading at $108.72, down $24.55 from its 12-month high and $63.04 above its 12-month low. Technical indicators for NFLX are bullish and the stock is in a weak upward trend. The stock has recent support above $104.50 and has resistance below $117.75.

The video-streaming giant will report fourth-quarter earnings Tuesday amid concern that its domestic user base is not growing at the rate that the company or investors want. Wall Street expects Netflix to add 1.62 million U.S. subscribers for the three-month period that ended Dec. 31. But some analysts are now saying that Netflix may not reach that benchmark.

Earlier last week, Netflix shares fell 10 percent after the financial firm ITG lowered its estimates on U.S. subscriber growth to 1.13 million net additions, versus Netflix’s own guidance of 1.3 million. Reaction to that seemingly inconsequential prognosis is further proof that Netflix’s domestic growth is still a critical metric for the TV streaming giant. Even as it aggressively expands its global footprint, including a surprise launch in more than 130 new countries announced at the Consumer Electronics Show in Las Vegas last week, Netflix’s stateside base still matters.

Netflix’s expansion ambitions, and its investments in original content, are coming at the expense of profits. Analysts polled by Thomson Reuters expect Netflix to post fourth-quarter net income of $9.6 million, or 2 cents per share, a significant decrease from $83.37 million, or 19 cents per share, for the same three-month period last year. Revenue is expected to rise 22.9 percent to $1.8 billion.

Also, adding to pressure is festering discontent from media companies over the perception that they have licensed their movies and TV shows to Netflix at too low a price. Investor conferences this past fall were abuzz with talk from media executives vowing to rethink their streaming deals. Analysts say that could impact Netflix’s ability to maintain its library.

In other Netflix news, CEO Reed Hastings sold 86,037 shares of the business’s stock in a transaction that occurred on Tuesday, October 20th. The shares were sold at an average price of $100.90, for a total value of $8,681,133.30. Also, insider Jonathan Friedland sold 1,309 shares of the business’s stock in a transaction that occurred on Wednesday, December 2nd. The stock was sold at an average price of $127.31, for a total transaction of $166,648.79.

Harvey’s Options Volatility Indicator

Conclusion

With the latest news, it means that in an instant the company tripled the number of countries where it offered its service, which opens the door for a huge revenue jump, but it will face increased costs (mostly marketing), as it enters so many new countries at one time. There is a lot of long-term potential for the company internationally, but investors will have to be willing to endure a few years of higher international losses before increases in subscribers offset the higher expenses.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the NFLX Mar 2016 100.000 put (NFLX160318P00100000) at approximately $7.50. Place a pre-determined sell at $15.00.

Note: No protective stop losses added -- but if you wish to do so make it $3.00.

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