Netflix (NASDAQ: NFLX) has long been a cult stock if you recall the days when it was trading in the $20-per-share area. And Apple (NASDAQ: AAPL) developed cult followers when it was trading at just $7 a share.
Fast forward and NFLX rang in 2010 in the $50 range and then catapulted almost 270% in the last year. The company added more than 3 million subscribers in Q4, and produced 87 cents earnings-per-share (versus analyst estimates of 71 cents). Revenue came in just shy of expectations, at $596 million versus $597 million.
That’s the good news. For those of us seeking options trading information the big question is, what NFLX options are worth buying?
If you have a company’s earnings release on your screen and you only have three minutes to read it, I suggest skipping to the “forward guidance” section to get the real corporate bill of health. Take that information with a grain of salt as companies are notorious for conservative predictions. And Netflix didn’t provide detailed guidance going forward. This may indicate that they expect losses next time around.
I look at NFLX in that light. They have 20 million subscribers but many are on some kind of free trial. The shift to streaming is promising but customers without consistent and dependable wireless access are not going to stick around.
Trading $210 stocks like NFLX gets expensive for option buyers. The out-of- the-money NFLX June 185 Puts, for example, were trading around $14 today ($1,400 for one option contract). That’s a lot more than I like to spend on options trades, but if this stock sees a correction, the payoff could be worth it.
One way to play a slide is to look at the out-of-the-money NFLX June 175 Puts, which were trading around $11 today ($1,100 per contract).
Granted the stock needs to take a serious drop for these puts to get in-the-money. However, NFLX is trading near its 52-week high, and has gone nowhere but up for about two years.
Still, keep in mind that out-of-the-money options contain pure time premium. And the longer you’re in the trade, the more the premium erodes. So it’s wise to keep a very close eye on your trade and adjust your position (i.e., get repositioned in a different strike price and/or a different expiration month) so that the passage of time doesn’t eat away at your returns.
