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One Big Trader Is Betting on Netflix

Brian Stutland, Managing Member, Stutland Volatility Group
Wednesday, 5 Dec 2012 | 3:34 PM ET
Netflix
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Netflix

The following post is a Guest Blog by CNBC Contributor Brian Stutland.

Yesterday, Netflix shares jumped 14% on news that the company has struck a deal with Disney to stream Disney, Pixar, and Marvel movies beginning in 2016, and if activity in the options pits is any indication, the rally could just be starting.

The stock saw above-average options trading volume on the news, with most of the volume coming into in the calls rather than the puts. While Netflix was at $86.45, one trader bought 400 weekly 90-strike calls for $1.39 each. This is a bullish bet that will profit if NFLX is above $91.39 -- or 5.7% higher -- at the close on Friday.

Far from an investment, this trade is a speculative bet that near-term momentum will continue to drive the stock upwards over the coming days.

(Read More: Netflix Says It Won't Raise Prices After Disney Deal)

The deal with Disney is the first time a major Hollywood film studio has chosen web streaming over premium cable channels, and it represents a major step forward for the Netflix business model. The market is eagerly awaiting disclosure of the financial terms of the deal, which could send Netflix shares sharply up or down depending on the news.

Analysts believe that Disney's current deal with Starz is worth about $250 million per year, and that Netflix could be paying as much as $300 million per year. The big Hollywood studios typically seek to maximum their return on content, and will consequently sell it to the highest bidder.

(Read More: Pros Warn of Short Interest After Netflix Pop)

In other words, this deal does not necessarily mean that Disney believes its content will reach more viewers through Netflix than Starz. It just means that Netflix was willing to pay the most for the content.

If Netflix wants to continue acquiring exclusive content from the other major studios, the costs could quickly get out of hand. However, if Netflix was able to negotiate a deal similar to the $250 million per year Starz deal, then the stock could see more upside.

Buying calls is a lucrative way to play this, but considering Netflix's price-to-earnings ratio of 96.2, I would stick to quick trades on the stock. I would only look to invest in the longer term once there is more clarity on the company's financial situation.

(Read More: The Future of TV? Netflix Scores Massive Disney Deal)

Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."

Watch "Options Action" n CNBC Fridays 5:00 p.m. ET, Saturdays at 6 a.m. ET and on Sundays at 6 a.m. ET.

Questions, comments send them to us at: optionsaction@cnbc.com

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