Wednesday, December 5, 2012

Unusual Options Activity

Yesterday Netflix shares jumped 14% on news that Disney has struck a deal with the company to stream Disney, Pixar, and Marvel movies beginning in 2016. This is the first time a major Hollywood film studio has chosen web streaming over premium cable channels, and represents a major step forward for the Netflix business model. The stock saw above average option trading volume on the news, with most of the volume concentrated in call trading. One trader bought 400 weekly 90 calls for $1.39 with NFLX at 86.45. This is a bullish bet that will profit if NFLX is above 91.39 or 5.7% higher, at the close on Friday.

This trade is a speculative bet that near term momentum will continue to drive the stock upwards over the coming days. The market is eagerly awaiting disclosure of the financial terms of the deal, which could send Netflix shares sharply up or down depending on the news. Analysts believe Disney’s current deal with Starz is worth about $250 million per year and that Netflix could be paying as much as $300 million per year. The big Hollywood studios typically seek to maximum their return on content and will sell it to the highest bidder. This means that Disney does not necessarily believe its content will reach more viewers through Netflix than Stars, it simply means that Netflix was willing to pay the most for the content. If Netflix wants to continue acquiring exclusive content from the other major studios, the costs could quickly get out of hand. However, if Netflix was able to negotiate a deal similar to the $250MM/year Starz deal the stock could see more upside. Buying calls is a lucrative way to play this, but considering Netflix’s P/E of 96.2 I would stick to quick trades on the stock and look to invest for a longer term only once there is more clarity on the company’s financial situation.

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