Barron\'s - 30.09.2019

September 30, 2019 BARRON’S M7

The Striking Price

Options

Betting on a Netflix Bounceback

By Steven M. Sears

THINKING OF TRADING ON PRESIDENT DONALD

Trump’simpeachmentinquiry?You’reprob-

ably better off focusing on more knowable

dramas—suchas Netflix ’sdefanginginthe

stock market.

The streaming-media giant has fallen

from favor after leading the stock market

higher for many years, along with other

FAANG stocks including Facebook (FB),

Apple (AAPL), Amazon.com (AMZN),and

Alphabet (GOOGL).

Netflix stock (ticker: NFLX) slipped

intonegativeterritoryfortheyearonMon-

day. Shares are down about 2% in 2019,

about 32% below their May high, and off

some 30% over the past year.

Investors fear major competition from

Apple’sand WaltDisney ’s(DIS)streaming

services, both of which should launch in

November. And every bump in Netflix’s

businessincreasesitsfearpremiuminthe

options market.

Netflix remains a key way that younger

peoplewatchTV.Thus,themostimportant

question becomes how successful Netflix’s

new competitors will be in attracting new

customers.Agoodbet,andoneatoddswith

thestatusquoview,isthatmanypeoplewill

terminatetheircablesubscriptionsandbuy

allthreestreamingservices,especiallyifthe

originalcontentisascompellingasNetflix’s

Orange Is the New Black and Narcos.

Investors seem to miss that people buy

contentarguablymorethanchannels,andit

ishardtofinanciallyvaluecreativity.Ifthat

holdsinanewer,morecompetitiveenviron-

ment, the real issue for streaming services

will be which produces the best content.

Butit’shardforanalyststocreatemod-

els that measure ideas that cannot be ex-

pressedinnumbers.It’sfareasiertobear-

ishly adjust Netflix’s models—especially

sincesubscribergrowthhasweakened—than

totellclientstoholdsteadybecausestream-

ing content is about to get interesting.

Of course, this more positive view will

taketimetoplayout—liketheimpeachment

inquiry—buttheweaknessinNetflix’sstock

isarealopportunityforanyonecomfortable

selling cash-secured put options to buy the

stock below its 52-week low.

WithNetflixstockaround$263,investors

canselltheDecember$240putfor$11.50.If

thestockremainsabovetheputstrikeprice,

investors keep the hefty put premium.

Should the stock be below $240 at expira-

tion,investorsmusteitherbuythestockat

thestrikeprice,althoughtheeffectivepur-

chase price would be $228.50 (strike price

minuspremium),orcovertheput.(Putsin-

crease in value when stock prices decline.)

Over the past 52 weeks, Netflix’s stock has

ranged from $231.23 to $386.80.

The Netflix fear premium is high. J.P.

Morgan’s Shawn Quigg is telling clients

thatNetflix’soptionsarehistoricallyexpen-

sive.Thespreadbetweenthree-monthim-

plied volatility and realized volatility is at

the78thpercentileoverthattime,anindi-

cation that the options market is pricing

the stock as under pressure and likely to

make a big move.

The December expiration covers Net-

flix’s third-quarter earnings on Oct. 16. A

keytraderiskisthatsomethingspooksin-

vestors in the earnings report, all of the

fears about the future suddenly congeal,

and it causes a selling stampede.

Shouldthatoccur,investorscouldmake

upthedeclinebysellingcallsorputswith

strike prices above or below the stock

price.Netflixisexpectedtoreportfourth-

quarterearningsonJan.16,sotheimplied

volatility of those options will probably

quickly reflect November’s earnings.

If Netflix’s management team is savvy,

the company will, in the interim, manage

investor sentiment by releasing original

content,orbyannouncingplanstorelease

original content, that will compete well

against Apple and Disney.

After all, as all good executives know,

content is king. The suggested trade

expresses faith in Netflix’s long-term com-

petitiveness and a belief that the market

mob is always too bullish or too bearish.

That always creates opportunities for cold-

eyed investors who have the time and

resources to take advantage of them.

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

15

20

25

30

35

40

NDJ FMAM J J A S

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

50

85

120

155

190

225

260

O NDJ FMAM J J A S

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

8

9

10

11

12

13%

O NDJ FMAM J J A S

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

8

9

10

11

12%

O NDJ FMAM J J A S

Source: Credit Suisse Equity Derivatives Strategy

Skew indicates whether the options market expects a stock-market advance or decline. It measures the difference

between the implied volatility of puts and calls that are 10% out of the money and expire in three months. Higher

readings are bearish.

Week'sMostActive

Company Symbol TotVol Calls Puts AvgTotVol IV%ile Ratio

AAR Corp AIR 4619 3730 889 388 82 11.9

Synnex SNX 11916 7296 4620 1080 58 11.0

Comtech Telecom CMTL 2572 1284 1288 260 1 9.9

BRF-Brasil Foods BRFS 13248 12893 355 1368 50 9.7

Akcea Therapeutics AKCA 3226 1036 2190 400 49 8.1

Dova Pharm DOVA 4390 3762 628 548 56 8.0

FactSet FDS 9074 2688 6386 1156 93 7.8

Kforce KFRC 2079 1968 111 272 53 7.6

Nike NKE 495877 278405 217472 65508 49 7.6

Commercial Metals CMC 6400 4530 1870 976 97 6.6

Nucor NUE 83432 56398 27034 15052 84 5.5

Diamond Offshore DO 26642 2707 23935 4912 99 5.4

Jabil Circuit JBL 37659 23045 14614 7164 70 5.3

Entergy ETR 8187 6608 1579 1632 75 5.0

PriceSmart PSMT 6150 2292 3858 1244 91 4.9

BlackBerry BB 193474 118433 75041 40608 81 4.8

Virtu Financial VIRT 12548 10628 1920 2660 73 4.7

SMART Global Holdings SGH 3691 1173 2518 788 91 4.7

Cintas CTAS 7431 4244 3187 1608 33 4.6

Marathon Petroleum MPC 288123 229064 59059 64524 90 4.5

Thistableofthemostactiveoptionsthisweek,ascomparedto average weeklyactivity–notjustrawvolume.Theideaisthatthe

unusuallyheavytradingintheseoptionsmightbeapredictorofcorporateactivity–takeovers,earningssurprises,earningspre-

announcements,biotechFDAhearingsordrugtrialresultannouncements,andsoforth.Dividendarbitragehasbeeneliminated.In

short,thislistattemptstoidentifywhereheavyspeculationistakingplace. Theseoptionsarelikelytobeexpensiveincomparisonto

theirusualpricinglevels.Furthermore,manyofthesesituationsmayberumor-driven.Mostrumorsdonotprovetobetrue,soone

shouldbeawareoftheseincreasedrisksiftradinginthesenames

RatioistheTotVoldividedbyAvgTotVol.IV%ileishowexpensivetheoptionsareonascalefrom0to100.

Source:McMillanAnalysis