Streaming giant Netflix (NFLX) is a tricky beast to tame, with NFLX stock gaining about 23% on a year-to-date basis. That’s a solid performance given the company’s prior dramatic gains and business dominance. However, recent sessions have also raised questions, with the security losing more than 9% in the trailing month. Even more conspicuously, NFLX is down 12% in the trailing week.
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Of course, much of the volatility centers on the content streaming specialist’s recent earnings miss. In addition, management lowered its operating margin forecast from 30% to 29%, thus raising immediate skepticism among stakeholders. Essentially, with so much enthusiasm baked into NFLX stock, there’s real concern that some investors may end up holding the bag.
At the same time, Netflix has been a mainstay in the new age of content consumption. As such, it’s not unusual for market participants to buy the dip in NFLX stock. Should similar sentiments arise at this juncture, the security has a solid chance of recovering from the present malaise.
In fact, if prior statistical relationships stay consistent moving forward, contrarian bulls may have an enticing upside prospect on their hands. With the leverage of a vertical options spread — specifically a bull call spread — there could be big payouts to be extracted from Netflix’s rare earnings stumble.
Drilling into the Quantitative Approach of NFLX Stock
When analyzing stocks, the two most common frameworks for evaluating investment potential are fundamental analysis and technical analysis. The former focuses on financial statements and business drivers to inform decisions, while the latter examines price patterns to identify potential breakouts or breakdowns.
However, both methodologies share a key limitation: their premises and conclusions depend entirely on the analyst’s own assumptions. Neither approach establishes universal truths beyond the observable facts of the security itself. For instance, a stock deemed “undervalued” or “mispriced” is typically so only within the context of the analyst’s specific framework and perspective.
Change the assumptions, and the entire valuation assessment may change. That’s why it’s not unusual for two analysts to look at the exact same data and come to ten different conclusions. While this interpretive art may work under certain circumstances, in my opinion, both the fundamental and technical approaches are useless for options trading.
To borrow a phrase from politics, options don’t care about your feelings — a trade is either profitable or it isn’t. It’s a cold, unforgiving environment, and navigating it requires an equally disciplined system. That’s where quantitative analysis comes in.
Quantitative analysis is the study of pricing behavior to extract potentially profitable trading ideas. While this sounds like technical analysis, the quant uses actual data science to establish probabilistic distributions of forward outcomes.
Drawing on principles from GARCH (Generalized Autoregressive Conditional Heteroskedasticity) studies, the quantitative approach focuses on the impact of specific stimuli. We know through GARCH that the market responds to different magnitudes of volatility. It stands to reason, then, that these differences also yield various forward outcomes.
Using past analogs, we can estimate where a security — NFLX stock, in this case — may end up, depending on the specific stimulus applied to the price action. Best of all, we’re not guessing about the impact, but we’re actually using prior empirical data in our calculations.
Letting the Data Do the Trading for Netflix Stock
A significant advantage of the quant approach is that it takes much of the guesswork out of certain options-trading strategies. If you trust the data, then you have a reasonable idea of where the target security may end up. Simply place the crosshairs of the options strategy accordingly and make minor adjustments based on your risk-reward tolerance.
Let’s look at the case of Netflix stock more closely. Under homeostatic or baseline conditions, the projected 10-week returns would be expected to chart a standard distribution, with prices mostly ranging between $1,060 and $1,210 (assuming an anchor price of $1,094.56). Further, price clustering would be most prominent at $1,140.
However, we’re not under baseline conditions but under a distribution-heavy 4-6-D sequence: four up weeks, six down weeks, with an overall downward slope. In this circumstance, the expected price range would be roughly the same as the baseline state. However, the distribution will be somewhat skewed, with price clustering most prominent at around $1,150.
To be fair, that’s less than a 0.9% positive delta in price density dynamics. Still, that’s a favorable delta for bullish traders, particularly because it’s a difference market makers aren’t pricing in.
Those who want to take a shot may consider the 1,120/1,140 bull call spread expiring on December 19. This transaction involves buying the $1,120 call and simultaneously selling the $1,140 call, for a net debit paid of $955 (the most that can be lost in the trade).
Should NFLX stock rise through the second-leg strike of $1,140 at expiration, the maximum profit stands at $1,045, a payout of over 109%. Breakeven comes in at $1,129.55.
What makes the above trade so intriguing is that, again, price clustering would be expected to occur on average at $1,150. So, betting on a strike price that’s ten bucks lower — while still potentially extracting a triple-digit-percentage-point payout — is very tempting.
Is NFLX Stock a Good Buy?
Turning to Wall Street, NFLX stock carries a Moderate Buy consensus rating based on 24 Buys, six Holds, and one Sell rating obtained over the past three months. The average NFLX price target is $1,402.19, implying almost 27% upside potential over the coming year.
Let the Numbers Do the Heavy Lifting
In finance, most of the heavy lifting in both fundamental and technical analysis is carried out by the analyst, since the premise and conclusion depend entirely on individual interpretation. The quantitative approach, by contrast, allows the data to speak for itself.
For Netflix, the statistical distribution currently points to a higher probability of an upside move. Accordingly, our position aligns with where the numbers suggest the stock is headed.