Netflix, Inc. (NASDAQ:NFLX) is a momentum stock that has recently had an outstanding reaction to the July earnings report. The stock as a result 15% almost overnight. Alas, soon-thereafter it came back down to the scene of the crime and therein lies my opportunity today.
Fundamentally, NFLX is not cheap and so far Wall Street pays the premium for its stock on the back of “hopium” over the potential for global expansion.
Some experts argue the opposite side of the coin. Its leadership in the streaming field is undeniable. But there are many who worry over increasing content costs. So the topic is debatable with no clear winner so far …
To me it’s simple. Until we know the outcome of the NFLX stock movie, I trade the price action inside the current macro. As long as stocks are bullish, NFLX should trade inside a predictable range.
I acknowledge that there is fierce competition coming from the likes of Walt Disney Co (NYSE:DIS), Amazon.com Inc (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB). Most recently, Apple Inc. (NASDAQ:AAPL) announced it will spend billions creating its own content. Those are formidable foes down the line. But for now, there is no imminent threat.
For the long term, I hope that NFLX is preparing to do battle. These are names that should make any management team shutter. I’d bet that NFLX needs to change its cost structure but for now I am willing to bet bullishly on dips like this one.
Under the current scenario, I am willing and able to own NFLX shares especially if they fall further. This is critical to my style of trading.
Click to Enlarge My thesis today is mostly technical. The NFLX stock range has tightened considerably, which usually means that a move is imminent. While we don’t know which way they will take it since we just had a nice dip in NFLX, I bet it will be up and I want to profit from the bounce.
No, I won’t buy the shares and hope it materializes. Instead, I will sell downside risk to create income. This way I can profit from a bullish position with caution.
My trade set up will not have any out of pocket expense and give me a 10% buffer from current price. So I can retain maximum gains even if Netflix stock fails to rally or even if it falls further. All I need is for price to stay above my support levels.
Bullish Bet: Sell NFLX stock 6 Oct $150 put and collect $1 per contract to open. This trade has a 90% theoretical chance that price will stay above my sold strike. Otherwise, I would own the shares and risk losses below $149.
Selling puts naked into a high-ticket company requires sizeable margin. Traders can mitigate some of the risk by selling spreads instead. The risk of a credit put spread is limited by the width of it. Otherwise I am liable for losses all the way down to zero.
The Less Aggressive Bet: Sell NFLX stock 6 Oct $152.50/$150 credit put spread where I have a slightly lower odds of winning, but with much smaller dollars at risk.
Yet, if the spread succeeds it would yield roughly 15%. Compare this with buying NFLX stock at face value then without expecting a rally without a margin for error.
Investing in the stock market never is a guarantee. That’s why you shouldn’t bet more than you can afford 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 @racernic on Twitter and Stocktwits.
