Netflix Stock Split Creates Opportunity for Income Investors with Put Options
The recent 10-for-1 stock split of Netflix, Inc. (NFLX) has significantly lowered the barrier to entry for investors looking to generate income through short put options, according to a new analysis. The split, completed as of November 17, reduced the share price from over $1,100 to $107.58 as of Friday, November 28, making it more accessible to utilize options strategies.
Netflix Remains Undervalued Despite Recent Gains
Despite the price adjustment, analysts continue to see substantial upside potential for Netflix. A previous assessment, detailed in an October 24 report, indicated the stock was approximately 23% undervalued based on its strong free cash flow (FCF). At that time, NFLX traded at $1,113.59 (or $113.36 post-split), with an estimated fair value of $137.40 per share. This valuation remains +27.7% above the current trading price.
Further supporting this outlook, a survey of 49 analysts by Yahoo! Finance reveals an average price target of $134.44, while Barchart’s mean survey price stands at $136.68 per share. This consensus underscores the potential for future growth.
Lower Collateral Requirements Boost Put Option Strategy
The stock split has dramatically reduced the collateral needed to sell short put options, a strategy that allows investors to profit from a stable or rising stock price. Previously, securing a short put position required substantial capital. For example, shorting a $106.50 put option expiring on November 28 required securing $106,500 to earn a premium of $1,863.
However, the lower share price now allows investors to implement the same strategy with significantly less capital. A new short play expiring December 26, 2025 – 27 days from now – at the $106.50 strike price now only requires $10,650 in cash to be secured with a brokerage firm. This represents a tenfold reduction in collateral requirements.
Optimizing Put Option Strikes for Yield and Protection
While the December 26 $106.50 put option offers a one-month yield of 2.62% (a premium of $2.79 on a $106.50 strike price), it is only 1% below the current trading price. To potentially increase yield while still maintaining a margin of safety, investors might consider further out-of-the-money (OTM) strike prices.
The $105.00 strike price put option, expiring on December 26, 2025, currently offers a premium of $2.18, providing an immediate yield of 2.076% (i.e., $2.18/$105.00) for one month. Although the strike price is 2.40% lower than the current trading price, the breakeven point – calculated as $105.00 – $2.18 = $102.82 – is 4.42% below Friday’s closing price of $107.58, offering substantial downside protection.
In conclusion, Netflix stock appears attractively valued. A compelling strategy for investors is to short one-month away put options, potentially securing a 2.1% yield at a strike price 2.40% lower, with a breakeven point 4.42% below the current market price.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.