Netflix (NFLX) reports first quarter earnings after the bell today and many investors will be watching the stock. Last quarter's results for Netflix stock were a shocker and prices plunged over 20%. The company missed its target for new subscribers and provided weak guidance.
XSlowing growth is of paramount concern, especially for a high P-E stock such as Netflix. Rising interest rate fears have shifted investors away from growth and were a factor in shares plummeting, down over 50% from all time highs. Investors who expect further weakness can consider using a bear put spread to take a negative view on Netflix stock.
Bear Put Spread Setup
To construct a bear put spread, simultaneously buy a put and sell a put at a lower strike price with the same expiration. For Netflix stock, investors can consider buying a 350 put while selling a 340 put, both with a May 20 expiration.
This trade costs around 4.40 per share. That's the most you can lose if the trade doesn't go as expected and with 100 shares per contract works out to a maximum loss of $440.
The maximum profit is the width of the strikes minus the debit paid. In this case, the calculation is 10 — 4.40 x 100 = $560. Investors will realize this maximum profit if Netflix stock trades below 340 on the May 20 expiration.
Netflix Stock Earnings Effect
For the earnings event, the market currently prices in an implied move of 10% for Netflix stock. That could be in either direction. Netflix moved an average of 6.7% on its past earnings reports.
This may appear overpriced, but remember, Netflix moved over 20% on Q4 results so a higher potential move this quarter is certainly justified. A structure such as the at-the-money put spread above has little exposure to the company's volatility.
This bear put spread on Netflix stock will likely experience either a full profit or full loss on expiration — trading like a binary option. That's because the upcoming earnings report and the strikes are closer together for this higher priced stock.
Still, a bear put spread has a unique advantage for investors as the risk from the trade is capped at the debit paid. This is opposed to shorting shares for Netflix stock where the risk is unlimited.
New Subscribers A Critical Component
Earnings expectations for Netflix stock are a 22% decline to $2.92 per share. Sales are expected to rise 11% vs. the year-ago period with revenue at $7.93 billion.
A key number that investors will pay attention to is the number of new subscribers, expected to come in at 2.5 million.
Netflix stock has an IBD Composite Rating of 54. After breaking its 40-week line in January shares traded sharply lower, driving the Relative Strength Rating down to 13.
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