Netflix options trade targets valuation gap, Michael Khouw says

A Netflix options trade built around August expiration is being presented by CNBC Options Action trader Michael Khouw as a way to use the stock’s cheaper valuation without taking a straight equity position. Khouw said Netflix was trading near $70, with a CNBC quote showing the shares at $71.08, up 1.41%, while the company’s forward earnings multiple had fallen to 18.9 times.

Khouw argued that the market has marked down Netflix even as the business has improved. He compared the current multiple with the stock’s 2022 bear-market low of less than 15 times forward earnings, saying the shares are now only a few turns above that trough despite stronger margins and cash generation.

The case rests partly on Netflix’s shift away from highlighting subscriber additions and toward revenue, margins and free cash flow, according to Khouw. He said that change pushed some growth investors away, while value investors have not fully embraced the stock because legacy media companies such as Disney trade at lower headline multiples, including below 13 times earnings.

What is the Netflix options trade Khouw described?

Khouw outlined an August 65/78/88 structure with 25 calendar days until expiration, using Netflix near $70 as the reference price. The trade sells the August 65 put and the August 78 call, then buys the August 88 call as protection against a larger move higher.

The package generates a net credit of $1.10, which Khouw described as a roughly 1.5% return over 25 days, or more than 20% on an annualized basis. He said the position’s profitable range runs from $63.90 to $79.10, covering about 9% downside and about 13% upside from the stock level used in the setup.

The long August 88 call limits the upside exposure on the short call to 10 points, according to the structure Khouw detailed. On the downside, he said assignment below $65 would leave an effective entry price of $63.90, which he characterized as about 17 times forward earnings and close to the valuation area reached during the 2022 downturn.

Why does Khouw see support for Netflix’s valuation?

Khouw pointed to Netflix’s advertising business as a key part of the investment case. He said the company has about 325 million paying members and offers connected-TV advertisers a large-scale audience, with advertising revenue expected at about $3 billion this year and potentially reaching $10 billion by 2030.

He also cited capital discipline and artificial intelligence as potential margin supports. According to Khouw, Netflix is buying back stock rather than paying for legacy studio assets, while generative AI could reduce production, dubbing and localization costs, areas tied to content spending.

Khouw said live sports, large events and AI-driven personalization are aimed at addressing flat viewing time and preserving pricing power. His conclusion was that selling volatility through the defined-risk options structure is more attractive than buying Netflix shares outright at current levels.

The trade described involves options risks, including assignment and losses if the stock moves outside the stated range. Khouw’s view represents his market analysis on CNBC’s Options Action, rather than a company forecast from Netflix.

This story draws on original reporting from CNBC.