Purge Netflix, Inc. (NFLX) Stock Without Paying a Penny

Advertisement

Netflix, Inc. (NASDAQ:NFLX) stock has defied gravity for years and continues to leave a long line of carcasses of those who have tried to short it. It’s easy to give in to bearish temptations when the price-earnings is pushing 300.

Purge NFLX Stock Without Paying a Penny

NFLX stock fundamentals, as they stand, are terrible. On paper, this business model shouldn’t be viable for the long term.

Expenses are high, and its already-low margins are getting squeezed by a list of new entrants that would terrify the bravest of the brave.

Netflix is now competing with Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL), Apple Inc. (NASDAQ:AAPL), Walt Disney Co (NYSE:DIS) and Facebook Inc (NASDAQ:FB).

Furthermore, it has to compete with the traditional media broadcasters who will offer online streams on their own content.

In short, regardless of who wins the online streaming game at the end, I know for sure that the margins can only get thinner. As a consumer, this is music to my ears but it’s definitely bad news for Netflix stock.

So you may have guessed it that I am sharing a bearish trade today. Before you label me a fool and order me casket, know that I will leverage the NFLX perceived value in order to make my short attempt fool-proof and have it cost me nothing out of pocket.


Click to Enlarge 
As much as I dislike the business model, I do love the way Netflix trades. Its fans have great conviction in its long-term story. They buy the dips! This comes from the belief in the global story. The bullish thesis assumes that management will be able to replicate its market penetration abroad as it did in the US. I remain skeptical there too but that’s beside the point.

The bullish thesis assumes that management will be able to replicate its market penetration abroad as it did in the US. I remain skeptical there too but that’s beside the point.

In my setup, I am not betting that NFLX will fail. I am merely shorting the near-term price action. I consider this a bet, so by definition I take it as a speculative trade inside a conservative portfolio. The risk associated with spec trades must remain at a size that won’t break my piggy bank.

The Bearish Bet: Buy NFLX 27 Oct $180/$177.50 debit put spread for $1 where I stand a 50% theoretical chance of success. I need price to fall through my spread to double my money.

I did note earlier that I will do this with no expense to me. Here is how.

The Bank: Sell NFLX Jan $135 put and collect $1.85. Here I have an 85% theoretical odds that price will stay above my strike. For those who don’t want to sell naked puts they can sell spreads instead.

Ideally, I need NFLX stock to fall below $170 and stop above $135. Then I would collect the most out of my bearish trade and my sold puts would expire for maximum gains. This sounds like a thread-the-needle trade, but it’s not difficult to profit.

Taking both trades results in a net credit of almost $1 per contract This means that I am getting paid to short NFLX. As long as long as the NFLX stock price stays above my sold put, any premium I recover from selling the bearish debit put spread would be pure incremental profit. This also means that I am profitable already even if NFLX rallies.

There are no guarantees when investing in stocks, so I never risk more than I can afford to lose.

Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/purge-nflx-stock-for-free/.

©2024 InvestorPlace Media, LLC