by Tyler Craig | November 16, 2012 8:37 am
What began as a mild, tech-driven correction has morphed into a seemingly endless slide scaring even the most ardent bulls. The vulnerable market certainly wasn’t helped by the barrage of selling that greeted investors following the presidential election. The S&P 500 Index has now fallen 8.2% since its early-September peak at 1,474. Sadly, the Nasdaq Composite and Russell 2000 Indexes have fared much worse, dropping roughly 11% apiece.
And yet, some special stocks have escaped the bearish onslaught virtually unscathed. Perhaps their uncanny strength has been driven by a positive earnings release or other promising company-related news. Regardless of the culprit, a select few stocks scattered among the market rubble have weathered the storm with uptrends intact.
One such stalwart is momentum darling of yore — Netflix (NASDAQ:NFLX). Since rocketing 33% higher in a mere two days last month, the volatile media company has spent November consolidating in a nice tight range. Though investors have bailed on stocks across the board, NFLX has seen nary a sign of distribution. The occasional down days of late have been shallow and occurred on little to average volume.
Click to EnlargeWith Thursday’s 2.13% pop, NFLX actually closed above the 200-day moving average for the first time since it began its epic descent in the fall of 2011. Not bad for a stock that has been left for dead by the lion’s share of investors. While this could be another in a long line of bullish head fakes, the price chart of NFLX is definitely looking more constructive than it has for many months.
Currently, the implied volatility of NFLX options is sitting in the middle of its one-year range, which means that they’re neither richly priced nor an outright bargain. Therefore, let’s consider an option strategy that isn’t really that sensitive to volatility but does provide a straightforward way of raking in profits if the stock continues to rise: the bull call spread.
The bull call spread consists of buying a lower-strike call while selling a higher-strike call in the same expiration month. The max risk is limited to the initial debit paid, while the max reward is limited to the distance between the strike prices minus the initial debit.
Traders looking to acquire bullish exposure to NFLX could purchase the Dec 80-85 call spread for $2.15 or better. The position offers the potential to double your money if NFLX rises past $85 by December expiration. The maximum loss is capped at $2.15, while the maximum reward is limited to $2.85.
At the time of this writing Tyler Craig had no positions on NFLX
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