July 25, 2011 / 7:30 PM / 8 years ago

UPDATE 2-Options investors hope for more Netflix gains

* Netflix to report earnings after the bell

* Substantial move expected; slightly bullish bias

* Growth, streaming outlook in focus (Adds share price)

By Angela Moon and Doris Frankel

NEW YORK/CHICAGO, July 25 (Reuters) - Options investors appear to be betting that Netflix Inc (NFLX.O), already up more than 60 percent this year, will continue its rise after its earnings report later in the day.

Options activity on the stock jumped on Monday with new positions being taken in weekly calls ranging from the $300 strike to $330 strike. Activity in those calls outpaced open interest, suggesting new bullish positions.

Shares of the movie-rental company have been unstoppable, rising 850 percent since the beginning of 2009. As the stock nears $300 a share, there are plenty of investors who believe the company’s move to raise prices could undermine the stock if it hurts subscriber growth.

Netflix is a heavily shorted name, even though those bearish bets as of yet haven’t panned out.

“It (Netflix) continues to have all the characteristics of a bullish momentum stock and the continuation of that trend will depend heavily on whether customers adopt the new pricing structure,” said Gareth Feighery, a founder of Philadelphia-based options education firm MarketTamer.com.

Shares have dipped a bit in the last two weeks since the movie rental company said it would raise monthly prices. The stock is down 5 percent since hitting a closing high of $304.79 on July 13. The stock was up $5.46 to $282.04, or 2 percent, in trading on Monday.

“Current front month near-the-money option prices are building in an expectation for movement of approximately 13 percent in either direction,” Feighery said.

“On only one occasion did Netflix fall over the past four quarters following earnings and even then the initial one-day decline of 9 percent was almost fully retraced by expiration when the stock ended just 2 percent lower.”

William Lefkowitz, options strategist at New York-based brokerage firm vFinance Investments, said the action in call options indicates new bullish positions that expect the stock to have a substantial upward move.

Netflix Inc is expected to report a profit of $1.11 per share on revenue of $791.5 million for the second quarter, according to Thomson Reuters I/B/E/S estimates.

The deciding factor for investors will be the company’s forward guidance. Netflix raised monthly prices of customers who use both its mail and online services, a move that could steer users toward its growing Internet streaming service. For details, see [ID:nN1E76B111]

Many investors still expect the stock will pull back from its stellar gains over the last few years. Nearly 19 percent of the outstanding shares are being borrowed to sell short, which is a high ratio. Thomson Reuters StarMine data ranks the stock higher than 86 percent of the stocks in its universe in terms of how vulnerable it is to a short squeeze.

“As it (stock price) nears $300, the key question that keeps popping up is whether or not Netflix’s subscriber growth will slow down? This quarter is no different in terms of key factors to watch as subscriber growth is the main focus. Increasingly, growth will be driven by international growth and streaming plans which present some new risks,” said a note by online stock analysis group, Trefis.com.

Reporting by Angela Moon, Editing by Andrew Hay

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