I have been outspoken against Netflix, Inc. (NASDAQ:NFLX) outlook in the face of gigantic competition from Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL). Despite that, I have consistently traded Netflix stock long behind the faith that Wall Street has for the stock.
That isn’t changing in the wake of Netflix’s first-quarter earnings report.
In trading, it’s important to set feelings aside and traded the price action. Late January, in spite of my own bearish opinion of its outlook, I shared a bullish NFLX trade that created income out of thin air. Today, following earnings, I’m looking to repeat that performance … but I’m by no means blessing its fundamentals, which still look as mix after its Q1 report as they ever have.
Instead, we’ll sell risk below support levels and let time do the rest.
Netflix’s critics point to the fundamentals from the bottom-line perspective. But when evaluating growth companies, experts should look for growth. Netflix has tremendous global growth potential — even its “miss” on Q1 international subscribers represented outstanding growth, and the company atoned by guiding Q2 better than the Street’s expectations. So for the short-term, this thesis stands undeniable.
Thus, NFLX gets a pass on all else as long as growth doesn’t slow.
Technically, Netflix stock has the potential to fuel much higher levels in spite of many haters. So I trade the tape — I don’t fight it. To me, this means that I get to rinse and repeat my previous trade, only on a different time frame.
How to Trade NFLX Stock Here
The bullish bet: Sell the Dec $110 naked put for $3.50 per contract. This trade has an 80% theoretical chance of success. I need Netflix shares to stay above my sold strike or risk being put the stock. Anything below $106.5 would accrue losses to me.
If I am not willing or able to own NFLX at $110, then I’d change this trade to be a credit put spread instead.
The alternate bullish trade: Sell the Dec $110/$105 credit put spread. If successful here, I can still yield 20%, only here the risk is finite to suit more conservative investors and smaller accounts.
Normally I like to sell upside risk for balance, but in the face of a fearsome momentum stock like NFLX stock, I will opt out. Given the size of the buffer and the time left until expiration, I am confident that I can manage short term price drops.
I am not required to hold my options open through expiration. I can close them at any time for partial gains or losses.
Learn options as easy as 1-2-3 here. 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.
