by Tyler Craig | October 17, 2012 8:39 am
Netflix’s (NASDAQ:NFLX) seemingly endless slide appears to be taking a bullish detour.
The beleaguered momentum darling of days gone by climbed as much as 36% earlier this month after finding support in the $53 area. Given the current pullback in NFLX, it appears traders who missed out on the initial surge might be receiving a second chance. Indeed, last week’s pullback is providing a low-risk entry point for those looking for another impulse move higher.
Click to Enlarge Although the impressive rise was sufficient to reverse the short-term trend higher, the bigger picture remains a bearish quagmire. As such, traders should consider the suggested bullish trade below to be a quick hit-and-run play only. The fact that NFLX reports earnings on Oct. 23 further supports the need to exit the position in short order.
While aggressive traders might opt for purchasing call options outright, I’m inclined to suggest a call spread instead. Because spread trades involve both buying and selling options, they create a hedged position that mitigates one’s exposure to time decay, volatility and an adverse move in the underlying stock. In the event NFLX decides to misbehave by dropping in price, the call spread will incur a much smaller loss than a straight call purchase.
One fairly straightforward bet worth considering is buying the November 65-70 call spread. Sometimes referred to as a long vertical debit spread, the position can be entered by buying a Nov 65 call and selling a Nov 70 call for a net debit of $2.25. The maximum risk is limited to the initial $2.25 paid at trade entry. The maximum reward is limited to the distance between strikes minus the net debit, or $2.75.
As for trade management, I would close the position at a loss if NFLX drops below $63. Alternatively, if NFLX rises as anticipated, consider remaining in the position until just before earnings next week.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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