The market has enjoyed a nice bullish run for most of 2012, but now that is coming into question with the Dow unable to close above the 13,000 mark. During the past week, the headline-grabbing broader index has made more than a few failed attempts to overtake this millennium mark.
With this psychological barrier rearing its head, there might be some drastic changes ahead not only with the broader market itself, but within certain companies as well. One company that springs to mind is Netflix (NASDAQ:NFLX).
The stock has enjoyed a nice rise as well in 2012, but it might be time for that to end. NFLX shares are up more than 55% so far year-to-date but have been drifting steadily lower since peaking near $133 on Feb. 7. Long puts are one basic options strategy investors may utilize to trade expected downside in the shares.
Netflix (NFLX — 111.67): Long Puts
The Trade: Buy the near-the-money March 110-strike puts for $5.30 or less.
The Strategy: The long put strategy is pretty straightforward. The trade can profit when the stock falls and will lose value if the stock stays put or moves higher.
Maximum profit is theoretically limited only by the zero mark because after all, a stock cannot enter negative territory. The maximum loss is 100% of the $5.30 premium paid if NFLX finishes at or above the strike price of $110 at March expiration (March 17). The breakeven price for this strategy is at $104.70 (the strike price less the premium paid). If NFLX is trading below this level when the options expire, the long put will be profitable.
The Rationale: NFLX operates on thin margins. Lately (as in this month), there has been a whole rash of new competition in the streaming video services sector. Coinstar’s (NASDAQ:CSTR) RedBox, Verizon (NYSE:VZ) and Comcast (NASDAQ:CMCSA) have all announced they will throw their proverbial hats in the ring.
With operating costs continuing to rise and now more competition, will NFLX be able to survive? Traders moved the stock lower by 11% after Comcast made its announcement last Tuesday.
Technically speaking, the stock broke down from a base it was holding in the $120 area, which generally is a bearish sign. Look for an opportunity on this trade idea if the stock can close below the low of the most recent bullish candle that was formed last Thursday ($111.16). This would trigger a bearish candle formation to the downside.
A nice target for this bearish trade would be where NFLX has some support in the round-number $100 area. On the upside, consider exiting this trade idea to cap losses if the stock moves above $114, last Friday’s high.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.