Wednesday was a rather difficult day for movie rental firm ^NFLX^ as it was downgraded by three brokerages in the morning. A day after setting new highs, Bank of America/Merrill Lynch, Susquehanna Financial, and Kaufman Brothers downgraded NFLX. Bank of America cut the firm to “underperform” from “buy” and the remaining two lowered the equity to “neutral” from “buy.”
Bank of America noted that the recent gains for NFLX stock are “pricing in a very optimistic scenario, in our view, which is hard to justify with a long-term analysis of company’s potential cash generation.” The brokerage also feels that NFLX’s option to stream movies online will eventually eat away at the value of the company’s home delivery movies. The other two brokerages stated the belief that the shares are now reflecting a good deal of the upside potential.
At the end of the trading day, NFLX had retreated more than two percent to close at $67.55. This news and the subsequent drop could not evade the scrutinizing eye of the options pit, as NFLX’s near-term 60 and 65 puts saw extremely heavy action. The March 60 put saw the heaviest volume, with 5,044 contracts traded and the March 65 put came in a close second with 4,971. All of the activity on the March 60 put was comprised of small trades, with no block of contracts greater than 279 trading.
As for the 65 put, two interesting blocks of contracts traded at around 11:15. The two blocks came across at the same time, carrying the same price of 90 cents, the bid at the time – suggesting that the transactions were sales. These blocks consisted of 421 and 418 contracts, so there is a possibility that one firm traded 839 of the March 65 put.
Possible motivations here were: a) cashing in on protective puts that did their job, offsetting losses on already-owned stock, or b) a bullish trade using puts to try and scoop up some stock at the bottom. NFLX closed significantly off its lows. So, either way these are options to watch over the next couple of days.
Dan Passarelli is the author of the book Trading Option Greeks and founder and CEO of Market Taker Mentoring LLC. Passarelli began his trading career trading on the floors of the Chicago Board Options Exchange and the Chicago Board of Trade making markets in options. He regularly shares trading insights and educational tips in his options blog (markettaker.com/options_blog/). Dan can be reached through his website MarketTaker.com and can also be followed on Twitter at twitter.com/Dan_Passarelli.