It’s far from a unique viewing experience — Netflix, Inc. (NASDAQ:NFLX) has forged a massive post-election rally to all-time-highs. But given the exaggerated level of overall market optimism, I think a scary picture could show up in a pricey NFLX stock.
For investors looking to pick up shares while there’s blood in the streets, Netflix stock is offerign that kind of opportunity today.
If you’re a Netflix bull, it probably has to do with the company’s sizable advantage in the SVOD or streaming video on demand? Or maybe you enjoy Netflix’s original and top-notch content like House of Cards, Stranger Things, Orange is the New Black or The Crown?
Bullish investors might also be gawking over Netflix’s earnings beat last month and the company’s unexpectedly strong international subscriber growth which easily topped forecasts. At the end of the day, Netflix deserves credit for its accomplishments.
The bad news is if you’re an NFLX stock holder right now, you’re paying dearly those successes. Netflix is expensive by most any measure and ultimately will require a good deal of things to continue to go right.
Bottom line: Competition and the rising cost to do business to remain top dog aren’t going away anytime soon. But that’s not to say Netflix can’t remain expensive, or that it won’t continue to dominate the SVOD space. Growth stocks like Netflix historically have a knack of keeping shares beyond the reach of value investors during their greatest periods of price appreciation. And for quite a few years, NFLX stock has been a poster child of this phenomenon.
Personally, I subscribe both literally and figuratively to Netflix’s largess, and overall, its product as a consumer. Netflix isn’t perfect, but I am happily willing to pay for it. That said, I think NFLX could be ready to hit the rewind button. And that means it’s not time to outright purchase shares.
But …
NFLX Stock Chart
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As part of those gains, shares broke out from a weekly handle and then its all-time-highs of $133.27 as a large corrective cup pattern was cleared. Given the size and duration of the chart formation, Netflix’s breakout move of around 10% above the cup isn’t considered technically extended.
That’s the good news.
The bad news is the overall market’s less stingy behavior, Netflix’s overbought stochastics and the stock’s rich market multiple. I think a test of the prior highs will develop, and NFLX stock will offer a better entry point.
How to Trade NFLX Stock
Right now, I like the 24 Mar $134/$130 put spread. With shares of Netflix sitting around $143, the out-of-the-money vertical is priced for a credit of 50 cents mid-market. If NFLX stock is above $134 at expiration, the sold premium amounts to a return of 14% for the one-month holding period. This allows for a decline or margin of safety of more than 6%.
A breakeven of $133.50 fits in very nicely with our anticipated test of prior highs discussed above. But if NFLX moves lower and fails to hold support, ultimately this vertical limits the investor’s risk to $3.50 no matter how low shares might sink.
If investors fail to capture the credit and are faced with a loss, and they’re still a fan of Netflix stock, they can receive shares through assignment or close the spread and purchase stock instead.
If you do want to buy NFLX stock, the most you would pay is $133.50. What’s more, this ensures that an effective entry price is never more than $3.50 above the current share price.
That’s good news, just in case.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
