Netflix, Inc. (NFLX) will release Q3 earnings after the market closes today. That has spurred heavy volume in slightly out-of-the-money (OTM) NFLX put options. Investors should be careful about copying this trade.
NFLX is trading at $69.67 at midday ahead of the earnings release. This is up from a recent Oct. 2 bottom at $67.06, but well off its 3-month peak of $82.73. Could NFLX move higher?
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Maybe. The chart below from Barchart seems to show that after earnings come out NFLX stock appreciates.
NFLX stock - last 3 months - Barchart - Oct. 20 - ahead of earnings release Upcoming Earnings and Valuation
Analysts forecast $12.87 billion in revenue, up 11.85% over last year's Q3 revenue of $11.51 billion. Earnings per share (EPS) is forecast to be $0.82, up 39% from last year's $0.59 EPS.
Moreover, in Q2, Netflix generated $1.525 billion in free cash flow (FCF) for a FCF margin of 12.14%. The prior Q3 FCF was $2.66 billion with a 23.11% FCF margin. That is going to be difficult to beat.
I discussed Netflix's earnings and valuation last week in an Oct. 13 Barchart article, “Netflix Is Set to Release Earnings on Oct. 20 - Will Its Free Cash Flow Hold Up?”
See whether management still projects $12.5 billion in free cash flow (FCF) for 2026. Moreover, if its FCF margin is 17.3% over the trailing 12 months (not including the $2.8 billion merger termination fee), NFLX's valuation could rise.
My article projects an 18.3% FCF margin for H2 2026 and 2027. That could lead to $10.4 billion in FCF next year and a $347 billion fair market value (FMV) using a 3.0% FCF yield. That's almost 20% (+19.65%) over its market cap today of $290 billion, leading to a price target (PT) of $83.36 per share.
Yahoo! Finance's analyst PT survey is at $91.13, and Barchart's survey is at $92.09.
The bottom line is that Netflix stock may falter if its FCF and FCF margins don't rise over last year and the prior quarter.
That could be why there is heavy volume in one-month expiry puts today.
Unusual NFLX Put Option Volume
Barchart's Unusual Stock Options Activity Report today shows that over 1,680 put options have traded at the $68.00 strike price expiring Nov. 20, one month from today.
That volume is over 13 times the prior number of puts outstanding, a huge increase.
NFLX puts expiring Nov. 20 - Barchart Unusual Stock Options Activity Report - Oct. 20, 2026 Moreover, the premium paid by the put buyers is $2.82, so they expect to see NFLX drop below $65.18, or a 6.4%drop in the next 31 days. That is lower than in the last 6 months, so the likelihood is not high.
However, consider this: after earnings, implied volatility (IV) tends to fall dramatically. That means the large amount of extrinsic value already in the put option price could decline. This is known as “IV crush.”
So, even if NFLX stock drops, the premium could fall. That means the put buyer could lose out, unless the drop moves it well below $65.00.
On the other hand, short-sellers of these puts collect an attractive premium: $2.82/$68.00 = 4.147% for the next month. Moreover, their $65.18 breakeven point is 6.4% below today's price.
Summary and Conclusion
Much will depend on whether Netflix can demonstrate to the market that its free cash flow (FCF) and FCF margins are improving. Despite its underlying higher valuation, Q3 results must show higher FCF, at least compared to Q2, if not the prior year.
As a result, investors should be cautious in copying this trade on the long or short side ahead of earnings.
I showed in my prior Barchart article, it makes more sense to do a put credit spread. I will write more on this after the earnings and the stock has reacted.
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.
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