Shares of Netflix, Inc. (NASDAQ:NFLX) have started to stall out after a rather impressive rally. Netflix is up almost 60% so far this year, far outpacing the strong 24% rise in the NASDAQ 100 year to date. After the latest earnings report on Oct. 16, NFLX is beginning to show signs of fatigue. I expect Netflix stock to continue to consolidate around curernt levels.
The latest two earnings reports highlight the ongoing bullish and bearish battles in NFLX — growth versus cost. Subscriber growth has continued to impress, with both the Q2 and Q3 reports blowing away estimates and adding over 5 million new subscribers each quarter.
Cash burn and content cost, however, remain a major concern.
Netflix is expected to spend nearly $8 billion in 2018 on content. Revenue growth is also beginning to slow as well, with last quarter revenue just slightly beating at $2.98 billion versus $2.97 billion projected.
For a momentum based stock like Netflix, fundamentals are largely ignored. A price-to-earnings ratio of nearly 200 combined with price-to-sales over 8 certainly are both eye popping numbers. In my previous post on NFLX I highlighted some of the issues on NFLX from a fundamental standpoint, and those issues still remain.
More importantly, Netflix stock is looking decidedly range-bound from a technical perspective. After making a new all-time high at $204.38 following the latest earnings report, shares of NFLX reversed course, closing back below the $200 level. This type of reversal pattern is many times emblematic of a short term top in the stock, as buyers shy away and sellers take control.
Click to Enlarge NFLX did find their footing, however, at the critical $190 support area. The stock bounced strongly off this level, which had previously been major resistance. I look for Netflix to remain mired in this range between $205 and $190 for the next several weeks.
While making money trading stock in a sideways market can prove difficult, the options market provides a low risk way to profit in this environment using an iron condor strategy. An iron condor is structured by simultaneously selling an out of the money call spread and a similar out of the money put spread.
For NFLX, we want to target $205 to the upside as resistance and $190 to the downside as support.
IRON CONDOR TRADE IDEA
Sell NFLX Nov $205/$207.50 call spread and Sell NFLX Nov $190/$187.50 put spread for a total credit of $1.20.
Maximum gain on the trade is $120 per condor while maximum risk is $130 per condor. Return on risk is 92.30%.
The short $205 call strike is just above the all-time high and the short $190 put strike is at major support.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com
