Netflix Looks Attractive to Short-Put Players - a 2.0% One Month Income Yield

Netflix, Inc. (NFLX) stock looks attractive to value investors, especially to out-of-the-money (OTM) short-put investors. For example, a 2.0% yield for one month is available on a put option with a 5% lower strike price.

NFLX closed at $73.69 on Thursday, Aug. 6. That's up from a recent bottom of $67.60 on July 20, but well below its April 16 peak of $107.79. But it still looks cheap, as this article will show.

NFLX Stock is Still Undervalued by 22%

Two weeks ago, Netflix released its Q2 earnings on July 16. The market overreacted, pushing NFLX stock down over 7%. It has now recuperated somewhat but still looks undervalued.

I wrote a July 19 Barchart article ("Netflix Tanks on Lower Margins and Flat Outlook - Time to Buy NFLX?) where I showed that NFLX stock could be worth between $77.22 and $85.70 per share over the next year, for a midpoint of $81.45.

Moreover, analysts have an average price target of $94.33 (Yahoo! Finance), $95.00 (Barchart), and $108.38 (AnaChart). The average of these price targets is $99.24, and including my lower price target ($81.45), the average is $94.79.

So, NFLX stock is still at least 22% undervalued based on these price targets.

In addition, shorting out-of-the-money (OTM) NFLX puts still looks like an attractive play.

Shorting NFLX OTM Puts Works - 1.85% Over the Past 2 Weeks

Two weeks ago, I suggested in the July 19 Barchart article that investors could short the $65.00 put contract expiring on Aug. 21. The premium earned was $1.28, giving the investor a 1.97% yield (i.e., $1.28/$65.00).

That was very attractive to investors, since the strike price was still 5.73% below the trading price at the time ($68.95) and had a low 26.6% delta ratio. That implied a low chance that NFLX would fall to $65.00 by Aug. 21.

NFLX has risen from $68.95 (on July 19) to $73.69 today. As a result, the premium has fallen to almost nothing, and the trade has been profitable. So, it makes sense, in just 2 weeks, to close out that play by buying back the $65.00 put for just 8 cents (at the midpoint).

That means an investor would have netted $1.20 ($1.28 - $0.08), or 1.846% over two weeks. That works out to a run-rate monthly expected return (ER) of 3.692% and an annualized ER of 44.3% (assuming it can be repeated).

A New Short Put Play Yields Over 2% For the Next Month

So let's try that. For example, the Sept. 11 expiry put option chain shows that the $70.00 strike price has a midpoint premium of $1.44.

That means an investor can make $144 over the next month by posting $7,000 in collateral and entering an order to “Sell to Open” a put at the $70.00 strike price.

This works out to a one-month yield of 2.057% (i.e., $144/$7,000). Moreover, the distance from the trading price is similar (-5.01%), and the delta ratio is similarly low at 28.4%. This can be seen in the Barchart table below.

Moreover, the breakeven price, should NFLX drop to $70.00, is $68.56, or 7% below Thursday's close (Aug. 6, $73.69).

That would provide investors a potential upside of 38.3% if they held on (i.e., $94.79 price target / $68.56 -1).

Basically, then, an investor would earn over 4% from these two short put trades after NFLX released its earnings (i.e., 1.97% +2.06% = 4.03%).

That makes it a very attractive play to value investors.