The intensity suffered by the stock market yesterday due to the Syrian situation and potential U.S. military involvement, saw nearly every major sector finish deep in the red. On top of this, there were a few other potentially negative headlines in the US that helped weigh on equity markets — the Fed tapering talks continued, the uncertainty of the next Fed Chairman and the next debt ceiling debate seemed to add to the decline.
However, if sanity reigns, when the situation is looked at with clear thinking, a recovery is very likely, which means there are a great deal of opportunities left knocking on the door. One that stands out is the pullback with Netflix (NFLX), leaving a need for a call option.
Despite the negatives yesterday, there were positives of importance that were reported as well — home prices increased in June, consumer confidence climbed higher in August, and Qihoo 360 Technology (QIHU) enjoyed some upbeat analyst attention –- so all is not lost!
As can be seen in the chart below, Netflix, an Internet subscription service streaming television shows and movies, suffered a similar fate as most other stocks and pulled-back, but by afternoon had started to level out and even made-up ground at various times.
Netflix has made the comeback of a century, quadrupling in value over the last seven months. This unheard of (and highly unexpected) turnaround story came after Netflix approached $300 per share and then plummeted to the low $50s. It was a painful moment for investors, but they got over it, re-invested in the company and transformed it into one of the year’s biggest stars on Wall Street.
There are several factors that will help Netflix move forward despite dramatic events being played out in the world. These are:-
- Globally, Netflix has 38 million customers, and in the 40 markets where the streaming firm operates, excluding the United States, Netflix accounts for 7.75 million subscribers, all within two-and-a-half years of its launch in international markets. Revenues from its international business stood at $308 million for the first half of 2013, implying growth of more than 185% over the same period a year ago.
- Netflix has expanded to 1.5 million paying subscribers in the United Kingdom alone and continues to give tough competition to traditional TV channels. House of Cards, starring Kevin Spacey, is exclusively available on Netflix and along with series like Breaking Bad has helped Netflix to raise its UK viewers into the range of 1.5 million and two million.
- Netflix has global ambitions and will look to launch in more European countries as well as Asia. The company recently announced that it plans to introduce its streaming service in the Netherlands in the second half of 2013.
- The outlook for Q3 is promising as the company expects to grow its international revenues by 125% and gain 0.9 million subscribers.
- The contribution loss (calculated by subtracting the cost of services and marketing expenses from total revenues) has been coming down due to improving economies of scale.
- Netflix has become adept at making changes as of late to keep up with their growing popularity. One example is the major demand for the personalization of streaming material per profile to become more customizable.
- Starting in 2016, Netflix will be “the exclusive U.S. subscription television service” for first-run films from The Weinstein Company.
- Analysts are still positive about Netflix, with TheStreet reiterating a “hold” in a research note to investors on Wednesday, August 21, and Robert W. Baird initiating coverage in a research note to investors on Thursday, August 8.
- There exist a few notable hedge fund managers who were upping their stakes in Netflix substantially. One such is Icahn Capital LP, managed by Carl Icahn, and holds the biggest position in Netflix with a $1.1697 billion position in the stock, comprising 5.4% of its 13F portfolio.
From a technical standpoint, Netflix, Inc. has been knocking it out of the ballpark, having tripled in value so far this year, and skyrocketing by close to 350% during the last 12 months. What’s more, the shares have outperformed the broader S&P 500 Index by north of 26 percentage points during the most recent 60-day time frame.
Therefore, based on the facts above the following options trades are recommended.
OPTIONS TRADE: Buy the NFLX Sep 2013 300.000 call (NFLX130921C00300000) at or under $3.50, good for the day. Place a protective stop limit at $1.40 and a pre-determined sell at $5.25.
Or you could take a bit of a longer term view by following this trade:
ALTERNATIVE OPTIONS TRADE: Buy the NFLX Jan 2014 350.000 call (NFLX140118C00350000) at or under $9.40, good for the day. Place a protective stop limit at $4.00 and a pre-determined sell at $14.00.
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