Shares of Netflix, Inc. (NASDAQ:NFLX) are starting to rebound after dropping 15% from the recent all-time highs at the $330 area. Certainly some of that drubbing in Netflix stock was simply based on a valuation realignment to a more realistic level.
It is important to remember, however, that NFLX stock absolutely blew away the subscriber growth numbers last quarter. Netflix also has zero issues with the recent trade war tirades because there are no tariffs on binge watching … at least yet.
Look for Netflix stock to be a relative out-performer in the near-term.
Netflix stock is starting to look attractive from a technical perspective. The MACD had reached the most oversold levels of the year but is starting to improve. The previous instance when MACD was negative proved to be a significant low in NFLX.
The price action from yesterday was also emblematic of a bottoming in the stock. Netflix stock opened lower only to reverse course and close near the highs of the day. This type of key reversal day marks a turning point in the stock, as the sellers become exhausted.
In a previous article on Netflix from March 7, I had a bearish outlook on NFLX with shares trading near the $325 level. Now that Netflix stock has fallen sharply, my bearish viewpoint has certainly tempered, because ultimately, price does matter. So while not a raging bull, I do think that the $250 support level will hold over the coming weeks. The 100-day-moving-average should also lend additional downside support.
Netflix options are still comparatively expensive, trading in the 89th percentile of implied volatility (IV). This favors option selling strategies when structuring trades.
So to position to be a buyer of Netflix stock on further weakness, a bull put spread makes intuitive sense. Earnings are due April 16, so I favor using May options to avoid the short-term noise.
Netflix Stock Trade Idea
Buy NFLX May $240 puts and sell the NFLX May $245 puts for a 75-cent net credit.
Maximum gain on the trade is $75-per-spread with maximum risk of $425-per-spread. Return on risk is 17.65%. The short $245 strike price is well below the major support level at $250 and provides a 15% downside cushion to the $288.94 closing price of Netflix stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.