Icahn Lights A Fire of Hope Under Netflix

Suddenly, I have to take an acquisition of Netflix (NFLX) a little more seriously.

At the end of October, iconic deal shaker and maker Carl Icahn disclosed an almost 10% stake of 5,541,066 shares in Netflix (NFLX), indicating HE thinks NFLX is deal-making material. From the filing under “Purpose of Transaction”:

“The Reporting Persons acquired the Shares with the belief that the Shares were undervalued due to the Issuer’s dominant market position and international growth prospects. The Reporting Persons believe Netflix may hold significant strategic value for a variety of significantly larger companies that are engaging in more direct competition with one another due to the evolution of the internet, mobile, and traditional industry. The Reporting Persons are considering ways for the Issuer to maximize shareholder value but have reached no conclusion. The Reporting Persons may in the future seek to have discussions with the Issuer.”

On Bloomberg Television Icahn gave a few more specifics:

“I believe that there is going to be great consolidation between Netflix and, everybody’s read about it, Amazon or Microsoft or Verizon or Google, there are so many possible combinations”

While I remain extremely skeptical that a company would waste its money on an acquisition that would face increasing competitive threats and increasing costs, I can be a believer in the stock action. Icahn is a special kind of institutional investor because his purchases tend to move stocks and his threats/promises to get a deal done can move the stock even more.

Icahn helps push Netflix upward and skyward
Icahn helps push Netflix upward and skyward

Source: FreeStockCharts.com

Ironically, I had been waiting for a big buyer to step in, but I thought that buyer would be the CEO himself, Reed Hastings. Icahn certainly works just fine for now.

This week’s hurricane-related two-day market closure left me with fewer days than I expected to work my positions in the weekly options that hedged my short call spreads (Nov 70/75s left over from a NFLX earnings-related trade). When NFLX gapped down as the latest M&A rumors failed to generate anything real over the weekend, I got ready to dump my weekly Nov $70 calls and cash in on the weekly Nov $62.50 puts. I expected the stock to collapse quickly under this scenario. However, the calls had quickly lost all their gains from Friday, so I froze. As NFLX recovered, the calls soon recovered most of Friday’s gains.

As the stock stalled, I sold those calls: I figured I had to make a decision today otherwise time decay would significantly erode value overnight. I used part of the profit to move up the weekly Nov $75 calls. While I lost profits on the gap in value between the $70 and $75 calls, I was of course relieved that I did not get over-confident about the waning viability of the short call spread position. However, it also did not occur to me to set a limit order to sell the calls, so I missed the NFLX prints above $80. With the overall position well in the green now, I will sell the $75 calls on Thursday and just ride out the short call spread to expiration. The great benefit of shorting a spread is that the losses are capped.

My primary lesson from this experience remains that I need to stick to my post-earnings trading rules that compel me to close out profitable positions as quickly as possible. If I had done that, my subsequent trades would have been greatly simplified. The secondary lesson is that it pays to respect stock action. If I had not taken it seriously, I would have missed out on a great opportunity. Finally, it seems again there is some potential in calendar spreads that use the premiums from shorting monthly spreads to fund directional bets on weekly options.

Be careful out there!

Full disclosure: long NFLX calls and puts

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