Stream Profits From Netflix, Inc. (NFLX) Stock for Free

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A big move is likely coming to a Netflix, Inc. (NASDAQ:NFLX) screen near you. Technically, NFLX stock is wound tight, which usually is a buildup of energy. Price is setting higher lows and knocking on a roof. If the roof breaks, the bulls will prevail and overshoot. A bullish position in NFLX now is anticipatory, but could be worth the risk.

Stream Profits From Netflix, Inc. (NFLX) Stock for FreeIdeally, I would want to wait and see NFLX take out $129.50 per share, but in this uber bullish market I’m willing to jump the gun and start the position. I will take half then add to it a few days later if the price action proves friendly to my thesis.

Fundamentally, I actually don’t like NFLX’s valuation. I believe that its profit and loss statement will be negatively marred by Amazon.com, Inc. (NASDAQ:AMZN). Few companies have survived the AMZN gorilla assault. Wall Street is not properly reflecting the AMZN threat yet. They may regret ignoring AMZN stock — just as the brick-and-mortar retailers do today.

The last time I wrote about NFLX stock, I successfully shorted an overly bullish reaction. Today I’m taking the other side. Using the options market, I can risk less for a better bang for the buck, provided I guess the proper direction.

The Bet: Buy NFLX Feb $130/$135 debit call spread. This is a bullish trade that costs me $2 per contract to open. Those two dollars are my maximum potential loss. If Netflix rallies past my spread, I stand to more than double my money. I chose a near-the-money spread, so I only need to guess the direction. If the price of NFLX stock rallies, I benefit immediately.

There are risks to point out. The tight technical setup is a knife that could cut both ways. Meaning that the breakout could actually turn out to be a breakdown. If so, Netflix stock could retest the sub-$115 per share area. Should that happen, NFLX would then be sitting just above a giant price gap. Markets like to close open gaps.

Usually I like to hedge my risk. I often sell risk elsewhere to lower my out-of-pocket expense. In this case, I want to sell a credit put spread in the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) to finance my purchase of the NFLX call spread. If my thesis of a Netflix stock breakout turns out to be a breakdown, the risk of that would then be diffused into the QQQ. In short, I don’t trust a credit put spread in NFLX into this set up.

The Hedge: Sell Feb QQQ $113/$112 credit put spread. This is a bullish Nasdaq trade that nets 13 cents per contract. This alone trade would yield 14% on money risked with a 90% theoretical chance of success. The price buffer is not that large, but it would have the support of great mega-tech names like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB).

I am not required to hold any position through its expiration. I can close any of them for partial gains or losses.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/netflix-inc-nflx-stock-stream-profits/.

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