Traders Storm Netflix (NFLX) Weeklies as Shares Continue to Tank

NFLX – Netflix, Inc. – The bloodbath at Netflix accelerated Thursday afternoon, with shares in the provider of subscription streaming service down 13.0% at $110.59 as of 2:00 pm in New York. Investors began purging their portfolios of NFLX more aggressively in recent weeks, but the stock’s pull back began in July. Shares peaked at an all-time high of $304.79 on July 13, and have since lost nearly 65.0% of their value. Frenzied trading in NFLX weekly options that have one more day of trading left before expiration suggest we may see the stock extend losses through the end of the week. While trading in Sept. ’30 contract calls and puts is mixed across the board, it does appear that bearish positions are more prevalent today. Certainly, the surge in demand for deep out-of-the-money puts on the stock is a sign of the times. More than 2,300 puts changed hands at the Sept. ’30 $100 strike against open interest of 621 contracts. Buyers of at least 930 of the contracts paid an average premium of $0.24 each this afternoon. Sept. ’30 $115 puts are the most active, with volume in excess of 10,100 contracts in play. Buyers of the now deep in-the-money contracts outnumbered sellers, and purchased around 3,800 of the puts for an average premium of $2.05 a-pop. The cost of protective puts on Netflix have climbed steadily throughout the session, helped by the hemorrhaging in its shares, and the more than 15.4% surge in implied volatility to 89.5% today. Options volume on the stock is fast approaching 155,000 contracts as of 2:15 pm EDT.

BIIB – Biogen Idec, Inc. – Fresh prints in deep in-the-money put options on the world’s oldest independent biotechnology company suggests one strategist is positioned for shares in Biogen Idec to decline substantially in the next couple of months. Earlier this month, Barron’s columnist and options editor, Steven M. Sears, discussed Goldman Sachs’ recommendation to its clients to purchase bearish OTC put spreads that expire in three months on a number of names – including Biogen – with significant sales in Western Europe. In the September 19 article, The Striking Price: Play The Transatlantic Disconnect, Sears went on to describe the benefits of the put spread strategy for investors trading listed options. The use of the put spread helps reduce the cost of hedging against- or speculating on- potential declines in the price of an underlying security.

The put player populating Biogen this morning may be taking an outright bearish stance on the stock, or could be establishing downside protection to hedge a long position in the shares, ahead of BIIB’s third-quarter earnings report on October 25. The stock rallied earlier in the session, but now trades 0.05% lower on the day at $95.00 as of 12:15 pm in New York. The spread trader appears to have purchased 2,200 puts at the Nov. $85 strike at a premium of $3.09 each, against the sale of the same number of contracts at the lower November $70 strike for a premium of $0.85 apiece. Net premium paid to initiate the spread amounts to $2.24 per contract, thus positioning the trader to profit should BIIB’s shares drop 12.9% to breach the effective breakeven price of $82.76 at expiration day in November.

The investor responsible for the transaction may lose the premium required to establish the position in the event that Biogen’s shares exceed $85.00 at expiration. But, the $2.24 maximum possible loss on the spread pales next to potential profits the investor may realize given sharp losses in BIIB shares over the next eight weeks. The trader could walk away with up to $12.76 per contract in profits at expiration day should shares in Biogen plunge 26.3% from the current price of $95.00 to trade below $70.00. Shares in the biotech company last traded beneath $70.00 at the end of March.

DG – Dollar General Corp. – Options activity on Dollar General Corp. today suggests shares in the discount retailer of everyday consumer goods may face resistance at the $40.00-level through November expiration. Selling detected in the Nov. $40 strike call today follows what appears to be selling in those contracts on Wednesday. Further, call open interest suggests like-minded options strategists have been betting against Dollar General’s chances of topping $40.00 on a number of occasions over the past couple of months. Shares in DG fell 2.65% to $36.78 in early-afternoon trade, helped lower by Family Dollar Stores, which saw its shares surrender 6.0% on news shareholder Nelson Peltz withdrew his unsolicited $7.7 billion offer to buy the company.

It looks like one investor today sold a block of 7,190 calls at the Nov. $40 strike, minutes after the opening, for a premium of $0.90 per contract. Open interest in the Nov. $40 strike call suggests much of the 6,374 open positions were initiated by one or more sellers pocketing $0.90 per contract on Wednesday. Traders short the calls may be writing the contracts against existing long stock positions, or may be naked short the options. Call sellers keep the full $0.90 in premium at expiration as long as shares in the largest U.S. dollar store chain fail to rally above $40.00.

Similar call selling appears to have taken place at the Oct. $40 strike over the past five weeks. Call open interest is greater than 39,300 contracts at the $40 strike in the front month, and it looks like most of these positions were initiated by sellers of some 25,000 calls for an average premium of $0.29 each on August 31, following by the sale of around 11,000 calls at a premium of $0.65 apiece on September 16. DG hit a new 52-week high of $38.59 on Sept. 16. Investors short the near-term calls are sitting pretty so far, with shares in DG down 4.7% off their highest point, and the contracts available for purchase at $0.25 a-pop.

DWA – Dreamworks Animation SKG, Inc. – The creator of animated feature films popped up on our scanners this morning due to heavier-than-usual trading traffic in its put options. Shares in Dreamworks Animation rose 0.70% to $19.29 by 1:30 pm EDT. Though shares in the name are higher today, one put player appears to be positioning for the price of the underlying to pull back in the next three weeks. More than 1,000 in-the-money puts changed hands at the Oct. $20 strike against previously existing open interest of just 137 contracts. The options appear to have been purchased by one investor, who may profit on the position if DWA’s shares fall 3.05% to breach the effective breakeven point on the downside at $18.70 by expiration day next month. Options implied volatility on the provider of family entertainment is up 3.0% to stand at 53.84% this afternoon.

About Caitlin Duffy 373 Articles

Affiliation: Interactive Brokers

Caitlin Duffy joined Interactive Brokers in 2009. In her role as Equity Options Analyst, Caitlin provides daily market commentary; highlighting various options trades, trading patterns and strategies of interest. Through Interactive Broker's webinar program, Ms. Duffy presents a number of educational, options-related events describing the theoretical pricing of options, the option Greeks as well as options strategies.

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