If you watched the big game on Sunday, not only were you treated with witnessing maybe the best game of all time, but also a plethora of commercials. One that my friends and family talked about most was the trailer for the Netflix, Inc. (NASDAQ:NFLX) original series Stranger Things. The ad was for NFLX’s second season, which is scheduled to premiere on Halloween of this year.
Will the hype generate new subscriber growth like some hit series in the past of including the first season of Stranger Things, or will this potential bullish breakout on the chart be all the incentive traders need to be bullish?
If you believe in one or both of these bullish stimulants, here is a bullish trade idea on NFLX stock to consider.
The Setup
The rationale: After announcing earnings Jan. 18 after the close, Netflix stock has gapped up higher and refused to move lower over the past several weeks. In fact, NFLX has been trading in a pretty tight channel between $138 and $142 which in itself is considered to be a potential bullish sign. Many times after an extended move higher, a stock that does not pull back more than one-third of the advance is considered to be bullish.
What makes this trade idea even more potentially bullish is what happened on Tuesday.
NFLX stock closed above the $142 area which had been acting as resistance in a bullish manner (bullish candlestick). With the stock at the time of this writing trading at its all-time high, it may just continue to climb with no potential resistance at least from the charts.
A vertical debit spread with a relatively short expiration might be able to profit from an expected move sooner than later.
How to Trade NFLX Stock
The trade: Buy the NFLX Feb $140/$145 call debit spread (buying the Feb $140 c and selling the $145 call) for $3.05 or better.
The strategy: The maximum potential profit for this trade is $1.95 ($5 – $3.05) if NFLX stock stock is trading at or above $145 at Feb expiration. The maximum loss is $3.05 or whatever was paid for the spread if Netflix is trading at or below $140 at Feb expiration. Breakeven is $143.05 at expiration based on a $3.05 debit.
Although the risk is greater than the reward on this spread, NFLX stock would have to move just over a $1 higher after Tuesday’s close and stay there till expiration to realize the maximum profit. Consider it to be a bearish sign if Netflix once again closes below prior resistance at $142, which might now be considered potential support.
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at john@markettaker.com. As of this writing, he did not hold a position in any of the aforementioned securities.
