Investors got wind of a rumor that the Apple Inc. (NASDAQ: AAPL) TV will include Netflix, Inc. (NASDAQ: NFLX). This may be a situation where traders can buy the rumor — which began today with a big gap right at the open.
From a technical perspective this trade looks like it has further to run. If a deal is confirmed, investors may push NFLX up toward resistance near $145 a share.
There are several ways to take advantage of a trade like this, but with so much time value wrapped up in NFLX options, a “synthetic long” may be the best trade available.
This is an advanced strategy, so paper trade it if you have not done something like this before.
Trade
Sell to open the NFLX Sept 130 Puts and buy to open the NFLX Sept 135 Calls. This creates a position that should act a lot like just buying the stock but with a lot more leverage.
Target Entry Price
Right now this trade is paying a credit of about 70 cents. That means that if the options expired in September with the stock between $130 and $135 you would keep the 70-cent credit as profit.
Exit Forecast
A short put means that you have liability to the downside if the market does not perform as expected. We should be watching this trade closely if the stock dips below near-term support. We are expecting a move in the short term and will need to be out of the trade before the third Friday in September, which means that if the stock got to resistance near $145 we would consider an early exit.
Position Sizing
The maximum loss on the short put is theoretically unlimited. In fact, the risk profile for this trade looks very much like you had bought the stock. However unlikely, it is possible for the market to fall to $0. Your broker will require margin for this trade, which could be used as a proxy for the amount you have “invested” in the trade.
To learn more about executing this trade, watch the video here.
Note: It is important to understand the risks of trading options before you attempt a trade like this. This article is for educational purposes only.
This article is brought to you by LearningMarkets.com.
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