If you subscribe to bullish happy endings, Netflix, Inc. (NASDAQ:NFLX) is a buy, end of story. But if you’re mindful, highly regarded price patterns can at times become problematic; therefore, buying into NFLX stock with a bullish modified fence still gets my nod for “best options strategy.”
Let me explain.
It’s just short of two weeks since I wrote about Netflix stock. At the time, everybody was subscribing to Wall Street’s “ridiculously optimistic” outlook for the streaming on demand or SVOD giant following its awesome late January earnings take-down.
The post earnings show in NFLX stock was a good one for sure. But then, and rather quickly, came our warning of “stranger things” happening on the price chart of NFLX stock. Excessive optimism turned on itself and into a full-blown correction.
Does the wake-up call mean we’re at the end of one enduring and much-loved bull-run and into a new, more bearish narrative going forward in Netflix stock? I’m not entirely sure, but I am cautiously optimistic. However, I do believe all eyes are watching the same bearish-turned-bullish episode with their full attention.
NFLX Stock Weekly Chart
The daily chart in NFLX stock raises the question whether its hammer time for bullish investors or bears following the 12% corrective move of the last two weeks. What is known is Friday’s massive reversal candle received bullish confirmation Monday. However, the daily price action is also of the dime a dozen variety. As such, traders need to be mindful that highly regarded patterns can at times become problematic.
Bottom-line, NFLX’s corrective move resulted in a fairly healthy, 17.5% pullback. That’s nice. And the price drop looks even more attractive given the S&P 500’s and Nasdaq’s almost identical declines of nearly 12% and the type of panic that hasn’t been seen in more than two years.
So again, be mindful. Then, if you’re still an optimistic subscriber like me and believe its hammer time for NFLX stock bulls, be respectful of risk in case the show fails to go on and use Netflix’s options to position long with greater safety.
NFLX Stock Bullish Modified Fence
For investors that are bullish on NFLX stock but wish to be more respectful of price risk, a reduced and limited-risk modified fence still makes sense as a way to position. The 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 Netflix stock rallying above the vertical. But as it minimizes risk relative to shares, this type of position can also work well for investors’ intent to accumulate the stock on larger price declines.
Reviewing the options board in NFLX stock, one favored modified fence is buying the March $270 / $275 call spread and selling the March $235 / $225 put spread for even money or better. This particular combination allows the trader to position for the next few weeks with the potential to capture $5.00 in profit above $275.
Between the two inside strikes from $235 to $270, the position is a push. Below that range, the trader maintains a margin of safety of roughly 9% in Netflix stock before a loss will result at expiration. And with losses contained to $10 below $225 and nearly 13% lower, as well as some full-fledged value testing on the price chart, the modified fence remains my choice for the best options strategy.
Disclosure: 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.