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Traders are loading up on bets against Netflix ahead of earnings (NFLX)

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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 $162.02 at 10:25 a.m. ET on Monday.

7 17 17 netflix short interest COTD

SEE ALSO: Overconfident traders wind up on the wrong side of a $30 billion bank bloodbath

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