by John Kmiecik | September 16, 2013 8:06 am
When selling option premium, it usually is better to have a shorter term to expiration than a longer term. The simple logic behind that thought is because options lose their value over time, and the shorter the time there is until expiration, the quicker the premiums erode.
Here is a trade idea that tries to take advantage of that principle.
The trade: Sell the Sep 285/290 Put Credit Spread (selling the Sep 290 put and buying the Sep 285 put) for 45 cents or better.
The strategy: The maximum potential profit for this trade is 45 cents if NFLX is trading above $290 at September expiration. The maximum loss is $4.55 ($5 – $0.45) if NFLX is trading below $285 at September expiration. Breakeven is $289.55 at expiration based on a credit of 45 cents.
The rationale: Netflix has been one of those stocks that seems to refuse to move lower over the long haul. The company prides itself on not worrying about short-term profit potential and instead tries to better itself for the future. NFLX has been increasingly producing original programs to add to their increasing library. According to many analysts, the online streaming business has great growth potential, and Netflix plans on capitalizing on that now and in the future.
Click to Enlarge But really, this trade idea boils down to the charts since the options will expire in a week. NFLX just recently hit its all-time high just above $314, then pulled back. Netflix stock pulled back right to a previous pivot level (prior price levels) around $300, which could now be considered a support level. In fact, it looks like NFLX is really setting up to move higher and maybe test its all-time high again. If that does happen, this trade idea will be looking real good.
Just in case Netflix does fall below $300 for some reason, support at $290 needs to keep the stock from falling even further. Hang in there for one week, Netflix!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.
Source URL: http://investorplace.com/2013/09/credit-spread-netflix-nflx/
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