How to Trade Netflix, Inc. (NFLX) Stock on This Pop

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Trading Netflix, Inc. (NASDAQ:NFLX) through options has delivered easy results. Consider my mid-April write up where I delivered $2 in pure profits and with zero out-of-pocket risk in NFLX stock.

How to Trade Netflix, Inc. (NFLX) Stock on This Pop

Source: Via Netflix

Fundamentally experts believe that Netflix enjoys a head-start in streaming media that is insurmountable. I am not so sure since competition is coming fast and furious. Soon this will cause tremendous damage to the Netflix P&L.

In addition to traditional media competitors, Alphabet Inc (NASDAQ:GOOGL) is already chipping away and ramping quickly. Amazon.com Inc (NASDAQ:AMZN) is the bigger worry because it’s already there, but more importantly it thrives on thin margins. Netflix margins are already strained as it is. Undoubtedly Facebook Inc (NASDAQ:FB) will soon be another fearsome fighter for capture streaming eyeballs. These three combined already have billions of active users from multiple assets.

NFLX stock price not only does it carry a high sticker price, it’s also expensive. Wall Street gives it a pass on valuation for now on the promise of global expansion. NFLX Price-to-earnings dwarfs even that of AMZN so there is no room for error.

Technically, it’s never ideal to enter into a long position on a stock that is near all-time high. To make matters even more precarious is that markets in general are also at all-time highs. By definition this raises the risks of corrections. So my trade needs to leave room for error.

So buying the stock and risking $162 here is out of the question. Luckily I can use options to profit from Netflix stock with relative confidence.

The Bet: Sell NFLX July $130 put for $1. This is a bullish trade that requires NFLX stock to stay above my sold strike for maximum performance. The 17% price buffer from current level means that I have a 90% theoretical certainty for success. But if price falls below $130 I would need to buy the stock and accrue losses below $129.

Considering the low chance of failure I don’t feel compelled to sell opposing risk for balance. I can add it later if things change. Meanwhile, I am confident that I will be able to manage my risk against short term price gyrations.

Selling naked puts is not suited for all investors and for those I would use a spread instead. Those offer limited risk yet still deliver 9% in yield. Compare that with buying the stock and hoping it rallies 9% to match that of the spread.

Selling options is risky business and I only risk what I am willing to lose.

Learn how to generate income from options 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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/how-to-trade-netflix-inc-nflx-stock-on-this-pop/.

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