In September, I wrote a somewhat bullish buy-write/covered call article on Netflix. Around the same time, Paramount Skydance approached Warner Bros. Discovery CEO David Zaslav about a potential acquisition for $19 per share, the first of several private bids for the company. During this time, Netflix fell more than 6% by the end of October, which wasn’t great, but the covered call strategy outperformed as the sold calls offset about 40% of the stock price decline before option expiration. These days, I don’t participate for two main reasons. After announcing its third quarter results on October 21st, the company fell below its long-term moving average. Perhaps more importantly, Netflix officially entered the bidding war for Warner Bros., ultimately offering $27.75 per share in cash and stock, or about $83 billion, for WBD’s studio and streaming assets, an offer that Warner accepted. Generally, in these situations, the story is essentially over for anything but trading activity in the “risk arb” or “merger arb”. They typically try to squeeze the last few dollars out of a deal when the target company (in this case WBD) is trading at a discount to the transaction price by buying stock in the target company, selling stock in the acquirer’s company, and selling calls on the target company’s stock, often at or near the expected trading price. In fact, some of it took place here. Still, not to be outdone, Paramount Skydance, headed by Larry Ellison’s son David, almost immediately announced a hostile takeover of all of Warner. This would include the company’s cable assets, which total nearly $103.6 billion, including CNN, Food Network, HGTV, and OWN. Considering the bid is four times PSKY’s enterprise value (and nearly seven times its market cap), this sounds like Jonah swallowing a whale. But in this case, Jonah is backed by the Ellison family fortune, and David’s father Larry is worth significantly more than Paramount and Warner combined, despite the recent downturn in Oracle stock. Still, the Warner board appears unconvinced by David’s assertion that “money is not an issue” unless there is some financial guarantee from the parent company. It’s certainly an interesting situation, but what does this mean for Netflix? If antitrust regulators block the deal or Netflix pulls out, Netflix will owe Warner a record $5.8 billion in “breakup payments,” more than half of the adjusted net income the company is expected to earn this year. On the other hand, if Warner accepts the higher bid, it will now have to pay Netflix a $2.8 billion penalty. If it seems like there are a lot of moving parts, there really are. Despite Netflix and Paramount’s efforts to outdo each other, they face pushback from unions like the Writers Guild of America, SAG-AFTRA and the Teamsters, politicians like Massachusetts Sen. Elizabeth Warren, California Rep. Ro Khanna and Kansas Sen. Roger Marshall, and many others. This uncertainty continues to weigh on Netflix stock, which is currently down about 29% from its June highs, while option premiums have risen significantly. Even ignoring the takeover showdown and posturing, Netflix remains a leader in the streaming space. The business is expected to generate $51 billion in revenue in fiscal 2026, with year-over-year growth in adjusted earnings per share of more than 20% and free cash flow growth of more than 30%. The main reason why the company doesn’t land on my “buy” screen is that it’s still below its long-term moving average, but stock reviewers don’t always have the final word on whether a stock becomes attractive. At 30x expected earnings, Netflix’s value looks very reasonable, ignoring contract uncertainty. Due to uncertainty and stock price rebound, investors interested in upside exposure at a more attractive valuation may consider call spread risk reversal. This, like the February 88/96/110 configuration outlined below, combines a bullish position on the stock with the view that the uncertainty is likely to be resolved within the next couple of months or so. Disclosure: All opinions expressed by CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, its parent or affiliate companies, and may have been previously disseminated on television, radio, the Internet, or another medium. The above is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any securities or other financial assets. The Content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor. Click here for full disclaimer.
