Netflix, Inc. (NASDAQ:NFLX) shareholders continue to dance on the graves of any and all naysayers.
The stock tagged yet another all-time high today at $628.50 on the heels of Pivotal Research raising its price target for the popular media company to $850.
With the stock nearly doubling this year the shortsellers have experienced a rout of epic proportions.
As bullish as the news and behavior of Netflix stock has been of late you would think it would be a no-brainer buy here.
Not so fast, trigger.
Given its lofty perch NFLX is providing anything but a low-risk entry. Would-be buyers would be well-served to wait for a bout of profit-taking to take the stock down a notch before piling in.
Consider how far above the 50-day moving average the price of NFLX has ventured. At $621, Netflix is about $121, or 24%, above the 50-day. Take a gander at the stock over the past few years and you’ll realize it’s relatively rare for it to continue plodding higher once it’s already that far above the 50-day moving average.
While NFLX stock may well continue its ascent towards the $850 price target over the long haul, in the short run the odds favor it chills out for a bit to digest its recent gains.
At current levels we can make a fairly compelling argument that now is the time to strike for tactical contrarians (that’s fancy-pants terms for bears).
Embrace High Odds with NFLX Bear Call Spreads
Rather than shorting the stock outright — which is about the riskiest way of fading the rally — consider a high probability play like bear call spreads
Sell the Jun $680/$685 call spread for 55 cents. Consider it a bet NFLX fails to rise above $680 over the next month.
The maximum reward is limited to the initial 55 cents. The maximum risk is limited to the distance between strikes minus the net credit, or $4.45, and will be lost if NFLX stock rises above $685 by expiration.
At the time of this writing Tyler Craig owned bull put spreads on NFLX.
