If you subscribe to what others are saying off and on the price chart about Netflix, Inc. (NASDAQ:NFLX), shares are still a buy. However, to avoid profit-taking in NFLX stock while simultaneously positioning for continued momentum, a bullish modified fence gets our nod for “best options strategy.” Let me explain.
As CNBC’s James Cramer and host of Mad Money noted, “it’s pretty easy to see why Wall Street is so ridiculously optimistic on Netflix’s future” following the streaming video on demand or SVOD giant’s latest earnings report.
For one, Netflix delivered the goods top- and bottom-line for its fourth quarter. But that’s just a sneak preview of the real show that has rocketed shares up about 25% in the past five sessions since announcing its results. More importantly, ongoing worries Netflix that won’t be able to repeat its domestic performance of viewing dominance in overseas markets were severely punctured.
Bottom line (or more like top-line in this instance), Netflix not only blew past international subscriber growth targets of 5.05 million with 6.36 million net adds, management also raised subscriber guidance for Q1 to 4.9 million compared to Wall Street’s forecast of 3.9 million.
I suppose it is understandable why investors have had an enthusiastic penchant for NFLX stock over the past week. But be forewarned, “stranger things” like profit-taking or even full-blown corrections have been known to happen from time to time.
NFLX Stock Weekly Chart
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In just over a year’s time NFLX has gained around 112% since shares broke out of a fairly large, time and price, corrective base established in 2016. But a mostly firm and steady uptrend marked by a few healthy basing patterns responsible for roughly the first two-thirds of those gains has quickly turned into momentum spectacle on the Netflix price chart. That could be a problem for today’s bulls.
Coupled with a longer-term two-step or mirror move pattern from 2012 which has NFLX stock testing its 162% price extension and clearly overbought stochastics and Bollinger Band set up, this strategist anticipates shares are poised for profit-taking. At the same time, calling tops and not respecting trend persistence in a name like NFLX, could always be a costly strategy to subscribe too.
Netflix Stock Bullish Modified Fence
For investors who are bullish on NFLX stock but share our concern about the Catch-22 of technical momentum, one reduced and limited-risk options play I like is the use of a modified fence.
This type of combination purchases a call vertical and sells a put vertical in the same contract month to finance the position. The primary objective is for the call spread to go fully in-the-money with NFLX stock rallying above the vertical.
The strategy can also work to a trader’s advantage compared to owning stock outright, if one is inclined to buy Netflix shares on an adverse price move. The reason is the loss from the spread could be minimal relative to the actual decline in NFLX stock and puts the trader in a much stronger position to consider buying on weakness.
Reviewing the options board in NFLX stock, one favored modified fence is buying the March $295/$300 call spread and selling the March $250/$240 put spread for even money or better. With shares at $284.60, the pricing is just above the mid-market price.
This particular combination allows the trader to position for a several weeks. If there continues to be price momentum, above $295 profits begin to build one-to-one with NFLX stock until $300 where a max profit capture of $5 would be realized at expiration.
If shares drop during the life of the position, the trader has a margin of safety of around 9% in NFLX stock before any potential losses will accrue.
That’s nice to consider given what we see as an increased possibility for some type of correction. And with a cap on losses set at $10 below $240 and nearly 16% beneath the current Netflix stock price, I don’t mind casting my vote for this modified fence as one a nominee for “best options strategy.”
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.