Go Long Netflix, Inc. Despite Political Uncertainty

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Netflix stock - Go Long Netflix, Inc. Despite Political Uncertainty

Source: Vivian D Nguyen via Flickr (Modified)

Since early February, the stock market suffered two corrections. We recovered from the first one in the sharp V pattern, but the second one is lingering a little longer.

The initial dip happened because of fears of wage inflation, which could cause the U.S. Federal Reserve to raise rates faster than anticipated. But since that initial shock, it has been a slew of political headlines that are stifling the sustainability of the rebound. These threats would seriously impact the macro-economic environment.

However, most experts now agree that these headlines are mostly negotiating tactics. In the end, neither China or the U.S. would want to jeopardize the long-term future of their economic relationship. They simply want the position themselves will the perceived advantage. And therein lies my thesis for the play on Netflix, Inc. (NASDAQ:NFLX).

The stock held up much better than the overall market as NFLX is still up almost 40% in 3 months. Compare that to Apple Inc (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) which are negative for the same period. The stock has fans.

The bullish thesis on Netflix stock is one of global expansion. It still has the first-mover advantage but that should be abating as it has monster competitors on its heels the list includes GOOGL, Facebook, Inc. (NASDAQ:FB), Walt Disney Co (NYSE:DIS), and all the traditional media outlets who also now have subscription models for their content.

Nevertheless, the market for online streaming is huge globally, so I think there’s room for all of them to thrive.

Fundamentally, NFLX is not cheap and that’s okay for a growth stock. My concern is that content costs seem large and I’m not sure that this would be sustainable for the long-term especially when you have thin margin experts coming to compete with you like Amazon.com, Inc. (NASDAQ:AMZN) for example.


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Yet, for the short term, NFLX stock continues to get the benefit of the doubt from investors on Wall Street. My opinion of the market in general for this year is still constructive, so there is a good chance that the Wall Street bulls will come back to buy this dip and if so then this one will soar.

Still, I do not want to buy NFLX at face value leaving no room for error. I want to account for potentially more inflammatory political headlines so I will use options instead where I can build buffers between current price and my level of risk.

The worst that could happen should the price go against my trade is that I end up owning Netflix shares at a deep discount from today’s price.

Netflix Stock Trade Idea

The Trade: Sell the NFLX Sep $185 put for $3.25. Here I have a 85% theoretical chance of success. If the price falls below it then I would suffer losses below $181.75.

Selling naked puts carries big risk, especially for a stock as expensive and as volatile as this during these uncertain times. For those who want to mitigate it, they can sell a spread instead.

The Alternate Trade: Sell the NFLX SEP $190/$185 credit put spread which would deliver over 10% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to win.

Get my free newsletter and subscribe to my YouTube channel 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/2018/04/netflix-inc-nflx-stock-political-uncertainty/.

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