Market Activity Signals Possible Reversal for Cloudflare’s Stock

Cloudflare Inc NET has played a key role in supporting the internet’s infrastructure, but it isn’t immune to the market volatility of this year. After reaching highs in February, NET Stock declined nearly 50% by April 9, before recovering some losses. Recently, there have been signs that informed investors are accumulating shares, suggesting changing market sentiment.

Beginning April 10, Benzinga’s options scanner detected several notable trading activities in NET Stock derivatives. Initially, bearish sentiment dominated, characterized by a mix of sold calls and bought puts. Interestingly, the most optimistic trade on that day involved neutral sentiment, indicating potential hedging; buyers were possibly acquiring calls to mitigate the risks associated with short positions.

By April 21, signs of changing sentiment emerged, although overall feelings remained negative. The most significant trade consisted of sold $100 calls expiring on May 9. Nevertheless, there were also sweep transactions for the same call that exhibited bullish sentiment, hinting at a shift towards optimism among informed investors.

The following day, unusual options activity was noted, displaying a clear bullish inclination. The largest trade involved sweep bullish-sentiment call options, specifically $115 calls expiring on January 15, 2027. Purchasing these calls requires confidence in a favorable market outcome, indicating a strong commitment from the buyers.

Cloudflare’s earnings report for the first quarter of 2025 is set for release on May 8, making this timely shift in investor sentiment noteworthy.

Analyzing the Shift in Sentiment

While assessing options activity is valuable, it’s essential to view it as a result of broader market sentiments. Focusing solely on options can be misleading, similar to measuring a person’s height based only on their shadow. These transactions are indicators but do not reveal the underlying fundamentals.

To fully grasp NET Stock or any security, understanding demand is vital. Price and demand are not synonymous. Price reflects when demand occurred at a specific moment; demand embodies buyer interest transitioning from inaction to action.

In simpler terms, price serves as a continuous signal while demand is an event that either occurs or does not. One cannot experience “half-demand.” This clarity enables the identification of recent patterns: in the last ten weeks, NET Stock endured a “3-7” sequence, showcasing three weeks of gains interrupted by seven weeks of losses, overall indicating a downward trend.

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Significantly, historically, a “3-7” sequence indicates a 65% likelihood that NET Stock will rise in the following week. Additionally, NET has generally displayed an upward bias in both price and demand.

In this context, informed investors might perceive Cloudflare Stock as an attractive opportunity. A surprise in the upcoming earnings report could further support this outlook.

Expectations for Q1 Earnings Report

According to historical data, following the “3-7” sequence, the average return one week later is a substantial 11.5% if the pathway is positive. Conversely, should the negative trajectory persist, the median loss is projected at 8.69%. This risk-reward dynamic is notably favorable for bullish investors. Furthermore, with both demand indicators and unusual options activity aligning positively, informed investors seem confident in a strong recovery.

Given these insights, one potentially effective strategy is the 127/133 bull call spread that expires on May 9. This involves purchasing the $127 call while concurrently selling the $133 call, resulting in a net debit of $215. If NET Stock surpasses the short strike price of $133 by expiration next Friday, the maximum potential return could be $385, representing a 179% profit.

It’s essential to highlight that the implied volatility (IV) for the May 9 options is notably higher than the historical volatility (HV). This typically occurs as market makers prepare for increased movements in the stock, justifying higher premiums due to the heightened risk.

For direct buyers of options, the elevated IV results in higher costs. Nevertheless, utilizing a call spread—with part of the transaction concurrently generating credit from the sold call—mitigates these additional expenses, making it a more strategic option for investors.

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