Call Buyers Rush Netflix Stock Ahead of Earnings

Earnings season is officially in full swing, with next week featuring off some high-profile names of its own. Among those slated to report is streaming giant Netflix, Inc. (NASDAQ:NFLX), which is scheduled to unveil its fourth-quarter earnings after the stock market closes on Monday, Jan. 22. Ahead of the event, NFLX stock this morning received price-target hikes from Rosenblatt to $265 from $225, and from Deutsche Bank to $210 from $200. Below, we take a look at how the FAANG stock has performed, and how options traders are speculating ahead of Monday's report.

Netflix stock has had a stellar year, picking up nearly 59%, while also touching a new record high of $226.07 on Tuesday. NFLX was slightly lower at last check, down 0.2% to trade at $219.95, but considering its 14-day Relative Strength Index (RSI) closed last night at 72 -- in overbought territory -- a near-term pullback may have been in the cards.

In terms of earnings reactions, NFLX stock has made some volatile post-earnings moves in recent years, surging 13.5% the day after reporting last July, and sinking 13% in both April and July 2016. Looking back over the past eight quarters, though, the shares have averaged a swing of 8.4% in either direction in the session after reporting. This time around, the options market is pricing in a smaller-than-usual 7.9% move for Tuesday's trading, per at-the-money implied volatility data.

Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is showing NFLX with a 10-day call/put volume ratio of 1.40, ranking in the 74th percentile of its annual range. This suggests call buying has been extremely accelerated compared to put buying during the past two weeks, indicating options buyers are anticipating a positive earnings reaction for the shares.

However, the recent appetite for the FAANG favorite calls represents a shift among short-term traders. The security's Schaeffer's put/call open interest ratio (SOIR) of 1.60 ranks higher than 98% of all other readings from the past year, meaning speculators are more put-heavy than usual among options expiring in three months or less. Specifically, peak open interest of 30,234 contracts is found at the February 150 put, most of which has been bought to open, according to data from the major exchanges.

The activity at this deep out-of-the-money strike likely represents shareholders initiating an options hedge against an unexpected decline, but skepticism toward the FAANG stock is seen on Wall Street. Twelve analysts still maintain a "hold" or worse recommendation on NFLX, while short interest accounts for four times the equity's average pace of trading. A positive earnings reaction could draw more bullish brokerage notes and/or spark a short squeeze.