Netflix Stock Maintains Trading Range – A Good Time for Short Income Players

Netflix Stock

Since the impressive Q3 earnings release on October 18, Netflix’s (NASDAQ:NFLX) stock has demonstrated resilience, providing an opportunity for income-oriented investors to employ strategies such as selling short out-of-the-money (OTM) put options.

As of Monday, December 11, NFLX closed at $459.89, slightly down from its peak of $479.00 on November 28 but notably higher than its low of $346.19 on October 18. The stock appears to be consolidating within a trading range following its earnings report.

Netflix’s Strong FCF Signals Potential Upside

Netflix’s robust free cash flow (FCF) margin of 22.1% in the last quarter, calculated by dividing $1.9 billion in FCF by Q3 sales of $8.54 billion, suggests positive prospects. Projections indicate a potential rise to a 24% FCF margin by the end of the next year.

Applying this 24% margin to estimated sales of $38.2 billion by the end of 2024, Netflix could generate an FCF of $9.168 billion. Assuming a hypothetical scenario where Netflix pays out 100% of this FCF in dividends, the stock could yield at least 3.33%, possibly reaching 3.0%. This calculation implies a market cap ranging from $275 billion to $305.6 billion, a significant increase from the current market cap of $201 billion.

Potential Upside for NFLX Stock

The estimated market cap increase suggests a potential 44.4% higher valuation for NFLX stock, translating to a value of $662 per share. This optimistic outlook may take up to a year to materialize as the market recognizes Netflix’s anticipated free cash flow in 2024. In the meantime, existing shareholders may seek ways to benefit from this potential appreciation, especially considering Netflix’s lack of dividend payouts.

Income Generation through Shorting OTM Puts

One strategy for existing shareholders to generate income while awaiting potential stock appreciation is to sell short out-of-the-money (OTM) put options with near-term expiration periods. The example of selling $450 strike price puts for December 15 expiration was previously discussed, where the short seller achieved a 57% gain.

Considering a potential rollover to the December 29 expiration period, the $440.00 strike price puts, 4.26% below the current stock price, offering more downside protection. With a premium of $2.47, this represents a yield of 0.56% to the short seller, equating to an annualized expected return of 9.52%.

In summary, while NFLX stock holds considerable upside potential, existing investors can concurrently generate income by employing strategies like shorting OTM puts in near-term expiration periods.

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