Counterintuitive Gamble! Mysterious Trader Bets on Netflix "Losing the Bid" Turning Out Positive, $14 Million Options Strategy Exposed

According to Zhitong Finance, options market data shows that a mysterious trader recently established an unusual position worth nearly $14 million, betting that streaming giant Netflix (NFLX.US) may still see its share price rise even if it loses out in the bid for Warner Bros. Discovery (WBD.US).

Specifically, this speculator bought 55,000 Netflix call options with a $90 strike price expiring in May and simultaneously sold the same number of $105 call options, partially offsetting the premium cost. This call spread strategy costs about $2.51 per contract, with a total premium outlay of $13.8 million. If Netflix’s share price rallies from the current level of $83, this strategy would give the holder the right to buy 5.5 million shares at a specific price.

In terms of background, Paramount Global (PSKY.US) on Tuesday made a new acquisition offer of $31 per share, which is more competitive than Netflix’s previous deal with Warner Bros. at $27.75 per share.

Although Warner Bros. has not withdrawn its recommendation to support Netflix’s acquisition proposal, it admitted that Paramount’s latest bid has triggered the threshold for further negotiations. According to the agreement, if Netflix’s bid fails, it will receive a $2.8 billion breakup fee.

Stimulated by this news, Netflix shares surged 6% on Wednesday, marking the largest single-day gain since April. JonesTrading event-driven strategy experts noted that the cleverness of this options combination lies in the fact that if Paramount ultimately wins, it could instead trigger a rebound in Netflix’s stock price.

If Netflix’s share price surges 30% before the options expire on May 15, the theoretical maximum profit for this position could reach $68 million; even with only a moderate rise, an increase in implied volatility could be enough for the trader to lock in profits.

Water Island Capital merger arbitrage fund managers analyzed that this shows there are investors expecting Netflix may choose to proactively terminate the deal. Notably, Politico reported that Netflix CEO Sarandos will visit the White House on Thursday to discuss the acquisition, which the market interprets as a signal that “Netflix may not have completely given up on raising its offer.”