Netflix, Inc. (NFLX) accomplished a 10-for-1 inventory cut up as of Nov. 17, decreasing the value from over $1,100 to $107.58 as of Friday, Nov. 28. That makes it a lot simpler to promote brief out-of-the-money (OTM) put choices for earnings.
Consequently, much less collateral is required to promote brief one put contract. Furthermore, it makes it simpler to set a decrease potential buy-in level. This text will present why.
Netflix remains to be price considerably greater than its current worth. I mentioned this in my Oct. 24 Barchart article, “Netflix Produces Sturdy FCF Q3 Margins – NFLX Appears 23% Too Low cost.”
On the time, NFLX was at $1,113.59 (or $113.36 post-split), and I confirmed that, based mostly on its robust free money circulation (FCF), Netflix was price $137.40 per share.
That’s nonetheless +27.7% greater than as we speak’s worth.
Furthermore, analysts nonetheless see good upside in NFLX inventory. For instance, 49 analysts surveyed by Yahoo! Finance have a median worth goal of $134.44.
And Barchart’s imply survey worth is $136.68 per share.
This underlines the potential upside in NFLX inventory.
One strategy to play that is to set a decrease buy-in worth by shorting out-of-the-money put choices. I mentioned this in my final article.
On Oct. 24, I really helpful promoting brief the $106.50 (post-split) put possibility that was to run out on Friday, Nov. 28. The premium obtained from doing this was $1.863 for a one-month brief play. The strike worth was about 4% or so under the buying and selling worth.
That implies that the investor made a one-month yield of 1.75% (i.e., $1.863/$106.50),. That was in return for an obligation to purchase 100 shares if NFLX fell to $106.50 on or earlier than Nov. 28.
Since NFLX closed at $107.58, it remained out-of-the-money (OTM). So, the investor’s collateral was not used to purchase 100 shares.
On the time, that may have required securing $106,500 ( i.e., $1065 x 100) to earn $1,863 shorting the $1065 put (submit cut up it is $106.50).
However now, it requires 10x much less cash to brief one put. For instance, a brand new brief play expiring Dec. 26, 2025, 27 days from now, on the $106.50 strike worth solely requires $10,650 in money to be secured with the brokerage agency.
This mid-point premium obtained is $2.79, so the one-month yield is 2.62% (i.e., $2.79/$106.50). Nevertheless, that strike worth is only one% decrease than the buying and selling worth.
So, it would make sense to brief an extra out-of-the-money (OTM) strike worth. The $105.00 strike worth put has a midpoint premium of $2.18.