Traders are loading up on bets against Netflix ahead of earnings

Stranger things netflix final
The Stranger Things kids are on edge, similar to Netflix shareholders ahead of earnings. Netflix

Netflix is set to report second-quarter earnings after the closing bell on Monday, and traders aren’t taking any chances with the red-hot stock.

Short interest — a measure of bets that share prices will drop — sits close to the highest level of the year ahead of the earnings announcement, according to data compiled by IHS Markit.

The increased shorting activity is a natural reaction to a stock that’s done as well as Netflix, which has surged 30% year-to-date. As part of the elite group known as FANG — along with Facebook, Amazon and Google — the company has been a crucial component of one of the year’s most popular trades.

Traders are also forking over big amounts to hedge against losses in Netflix. They’re paying a roughly 5% premium to protect against a 10% loss in the stock, relative to bets on a 10% gain, Bloomberg data show. That hedging cost is close to the highest of the year, and almost double the measure’s one-year average.

Based on recent history, it’s a savvy move to brace for fluctuations heading into earnings, since the streaming-video service has moved an average of 11% in the day following its last 12 reports, on an absolute basis.

Netflix gained 0.6% to $US162.02 at 10:25 a.m. ET on Monday.

Netflix short interest
As Netflix’s stock price has soared, so have bets that the company’s shares will fall. Business Insider / Andy Kiersz, data from IHS Markit