The Netflix Gamble: What a Bullish Turn in Options Trading Reveals About Wall Street’s Appetite for Risk

The market’s shift towards optimism about Netflix is more than just fleeting; it reflects investors’ willingness to take on risk, even as the stock continues to struggle with its core business. A surge in call options and decline of put options suggests that traders are betting big on a comeback quarter for the embattled streaming giant.

Netflix’s dismal track record over the past year is a stark contrast to this recent bullishness. Four consecutive earnings reports were followed by sell-offs, indicating that investors have soured on the company’s prospects. Yet, as of now, options pricing implies a 7.6% swing after earnings, roughly in line with the average realized move over the past year.

The technical picture is one possible explanation for this sudden turn. Todd Gordon, founder and CIO at Inside Edge Capital, notes that Netflix is currently testing its rising 200-week moving average as well as the $70 prior resistance-turned-breakout level from late 2021. Holding support at these levels could signal a turning point for the stock.

However, beneath technical analysis lies a more pressing concern: Netflix’s lack of engagement with viewers. Despite growing engagement in the U.S., Nielsen stats show that the company’s share of TV viewship has touched its lowest level in over a year. Rich Greenfield, co-founder and TMT analyst at LightShed Partners, attributes this decline to the absence of a major breakout hit in the last quarter.

This raises questions about Netflix’s business model sustainability. As competition from new entrants intensifies, can the company continue to rely on its ad-free subscription service? The introduction of an ad-supported tier may be a step in the right direction, but it also risks cannibalizing revenue from existing subscribers.

The willingness of traders to take on this risk is a testament to their confidence in Netflix’s ability to bounce back. However, this optimism comes with challenges. New ad-supported users likely watch less than older ad-free users, which could lead to a decline in viewership per subscriber.

This trend has far-reaching implications. If investors continue to bet big on Netflix’s comeback, it may signal a broader willingness to take on risk in the market. However, if the company continues to struggle with engagement and viewer growth, it could spell trouble for its long-term prospects.

Investors will be watching closely as Netflix reports its earnings Thursday. Will the company’s technical support hold, or will it succumb to the same pressures that have driven down its stock in recent quarters? Only time will tell.