by Preston James | October 27, 2011 9:48 am
Some of the craziest Wall Street action anyone can remember has taken place in all of four little letters:
This week, Netflix (NASDAQ:NFLX) has taken the ‘ol ker-plunge — careening over the edge, going from the land of triple-digits to double-digits.
In fact, just 3 1/2 months ago, NFLX fetched $300 per share. And as I pen this note to you, it goes for just around $80. Wow.
To be sure, there’s a unique way to put a bunch of fungolas in your pocket because of this truly unique situation that’s been served up here. And that’s what this edition of the “Weekly Windfall Corner” is all about.
The New Era for NFLX Traders
My strategy for NFLX takes advantage of two new realities facing the company:
1) There will be many, many, more months of volatile, temper-filled action in the stock price, and
2) We’re witnessing a one-sided overreaction on a scale that hasn’t been seen in some time.
Now, there’s no denying reality, which is that the stock dropped $40+ in one day, and is trading in the $70s right now. It’s also happening at six times the normal daily trading volume. This kind of action “is what it is” — and it doesn’t lie!
Not only this, but NFLX already has been dropping, sliding, losing and bleeding for several months now. Investors have been factoring in the new subscription changes, the price hikes, etc for several months already!
Before the earnings announcement, it was no secret Netflix was losing subscribers. The company even said so. They had estimated this number to be around 500,000.
But this week when they reported the real number to be 800,000 lost subscribers, investors freaked again — sending the shares down 35% in one day!
But wait. Is that you asking how many total subscribers Netflix has? It is?
Well, they have upward of 23 million. In other words, they still have 23 million paying subscribers!
NFLX’s Bigger Picture Hasn’t Changed All That Much!
So did they bungle their strategy a few months ago? Yes. Was their communication not the best? Yes. Is their CEO not the most-polished on all corners? Yes, yes, yes.
That’s all true. But to lose 75% of the company’s market cap in all of three months after losing about 3% of the subscriber base?
What we might be witnessing here is some of the most one-sided action in years, and here’s how I see things…
The whiners and complainers are dropping off … 800,000 of them so far. They’re furious, upset and voting with their feet — teaching Netflix a lesson.
But then there’s the “vacuum theory,” which states that when you remove something (like old clothes from your closet that don’t fit), something newer, cooler and more pleasant will rush in to replace the void.
Right now, extremely angry and bitter folks are leaving. And when all’s said and done, it’s probably going to be easier on the company, thanks to the vacuum theory!
And if they don’t replace them, I don’t think Netflix cares.
I’m just talking about reality here. They’d never say it, but maybe Netflix has turned a corner. After all, they’ve been running this same business model forever … they’ve had mega success … but now they want to modify it.
An Inflection Point for a Solid Business
I’m sure they see the landscape with a much broader lens than someone sitting in Topeka, Kan., ticked off about their new, higher Netflix bill.
After all, the company is extending streaming services overseas (with a launch in the U.K. and Ireland set for early 2012). They are busy signing new, exclusive content deals. And they also know that MOST CUSTOMERS WILL REMAIN THAT WAY when all’s said and done!
Again, 23 million paying subscribers are still 23 million paying subscribers.
And those people re-upping their membership every month means there’s a money-making options trade for YOU in there. Get the details on the next page…
Learn Preston James’ Weekly Windfall Secrets here.
We even did a flash poll at the office the other day, and no one was rushing to cancel his or her Netflix subscriptions. Out of 35 people, not one is grinding an axe — all are delighted to keep their movie queues full.
But here we sit — with the temperature on this stock gone cold. Call it the cherry on top of the sundae of carnage and bad breaks.
It’s overblown … and it’s just broken the scale.
But … could a comeback already be coming around?
Make Guaranteed Gains from Netflix – Right Now!
Here’s a strategy I’m putting to work that will take advantage of a volatile, opinionated stock in the short- to medium-term, yet will probably gain some upside over time just as everyone turns their head to look at other stocks and stories.
It also gains over time due to the one-sided and fierce nature of the selling that’s taken place.
With a purchase of some Netflix LEAP call options, say, the $75 calls for the year 2013, you would have the right to buy shares of NFLX stock right near where it trades today, after all this carnage. And you’d own that right all the way out to January 2013.
That’s your insurance policy, and buying those calls costs way less than the stock itself.
But don’t (just) wait for your long call to be profitable. Starting right now, you can bank some eye-poppingly high option premiums that you get to stick in your pocket — all while you wait and see what will become of NFLX.
Now here’s where the opportunity to generate regular weekly returns comes into play. …
With the new weekly options that get created every Thursday morning, you can become a seller of the week-to-week, volatile nature of NFLX.
To be more specific, I’ll choose to sell out-of-the-money weekly calls, up to two or three strike prices away from the current stock price. You can still put decent premium in your pocket, PLUS it will allow NFLX some room to run in case it wants to spike in any given week.
Remember, with weekly options, collecting four weekly option premiums equals out to roughly double the premium of the standard one-month (old-fashioned) options. That by itself is a compelling way to make money.
Not only this, but you have much more control when selling/collecting a week’s worth of premiums when compared to an entire month of time. For example, around earnings season, you can sell weekly premiums all the way leading into the week of the announcement, and then decide to lay off if you want until the news comes out.
With monthly options, you might have to forego selling options for the entire month that contains the unknown joker of the earnings announcement and its aftermath. This means for an entire month, you don’t create any income. There’s no fun in that!
Making the NFLX Weekly Options Trade
Buying the January (2013) $75 LEAP call option at current prices will cost you about $25.
Yet there’s more than 60 weeks before they expire … that’s at least 60 chances to collect roughly $1 or more on each option trade, PLUS give your LEAP option ample room to motor.
With NFLX trading around $80 and choosing an option that’s just a bit out-of-the-money, the November Week One $85 Calls could net you some nice income right now. These options just arrived “on the board” (as weekly options are issued on Thursdays). These calls look good here around $1.50.
What happens if NFLX dies on the vine? With all these weekly paycheck periods, it doesn’t take a math genius to see that you win even if it goes nowhere.
With this strategy, there is NO stock ownership, thus no margin requirements or margin calls.
It’s also a strategy you can do in most IRAs, as it’s one of the most basic and elementary options strategies. (You’re probably already approved to do this type of trade, but be sure to check with your broker first. If not, it may be time to find a better broker!)
I hope this finds you well and has you thinking about a stock like NFLX in a whole different way.
Over and out,
P.S. If you haven’t checked out my free information yet, you should. As you know, any good trading strategy for stocks or options boils down to this: You need to have an edge of “why this stock, and why now.”
Well, back during the market disaster in 2001 (witness the dot-com collapse as well as 9/11), I discovered a study that revealed 86% of the time a company released a certain, little-known piece of news, it made the stock go up over the next 3-6 months (and it’s not an earnings announcement).
I’ll tell you exactly what this little-known piece of news is right here >>>
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