by John Kmiecik | December 23, 2013 9:35 am
There are some stocks that seem like they can do no wrong for a trader. When I look back on the year, Netflix (NFLX) is certainly a leading candidate for me. Of course there is no guarantee that a trader will profit from a trade, no matter how good it looks, but this one’s a strong bet given Netflix’s strength.
The trade: Sell the January 335/340 Put Credit Spread (selling the January 340 put and buying the January 335 put) for 40 cents or better.
The strategy: The maximum potential profit for this trade is 40 cents if NFLX is trading above $340 at January expiration. The maximum loss is $4.60 ($5 – $0.40) if NFLX is trading below $335 at January expiration. Breakeven is $339.60 at expiration based on a credit of 40 cents.
The rationale: Netflix recently conducted a survey of its viewers on how popular binge viewing really is. Binge viewing can be classified as watching several movies or several episodes of a TV show in a row in one sitting. The results showed that 73% of the people that responded had positive feelings towards binge watching and 61% said they binge watch regularly. The results look very positive, especially if you are a company that provides viewing content. Even though this was a small sample of their customers, the numbers are sufficiently large. Revenues at NFLX rose more than 22% in the last quarter compared to last year, and NFLX stock has increased in value more than 300% since the beginning of the year.
It certainly looks like Netflix has room for more growth, but really this trade idea’s success boils down to putting the odds on our side because of the chart. The stock has multiple areas of potential support above the strike (340) that is sold in this bull put spread. The stock just recently cleared prior resistance at $370 which now could be considered support. It also has support in the $354 area from prior pivots (previous lows). In addition, the $340 level has support from being prior resistance for the stock and the 50-day simple moving average is just above that level for some reinforcement.
All that potential support on NFLX stocks looks like a great present from Santa for options traders.
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.
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