Netflix, Inc. (NASDAQ:NFLX) reported earnings last night and the stock soared 6% on the headline. Today, I am sharing a trade that continues to be bullish on this mega mover through 2018.
NFLX management met Wall Street’s financial metrics this quarter, but they beat expectations with regards to subscribers. This goes to the heart of the bull thesis for the stock. But most importantly, they upgraded their future prospects.
This was crucial to the upside move because, recently traders are focused on guidance more than actual earnings results. In this case Netflix beat the results and upgraded guidance so there really left no room for bears to sink their claws into.
Fundamentally, the story for Netflix is hard to short even though financially it looks like an iffy proposition having costs so high. But the scope that still lies ahead for them with regards to global expansion is just too juicy for bulls to ignore. The rate of expansion has been phenomenal with no let-up in sight.
What was hopium of global expansion is now a reality. NFLX overseas income is bigger than the US base. The future is here. So shorting now is financial suicide. Few can make the argument that they’re going to hit a roadblock big enough to stop this massive boulder that is rolling fast.
And therein lies my opportunity. I came into the earnings long Netflix calls, and now I am adding exposure by betting that NFLX support will hold through 2018. This will offset my entry costs into my calls thereby rendering me long NFLX for free.
In this case, technically I see support above $280 and $240-per-share. These are pivot points and they tend to offer support on dips. So I sell downside risk against bears who are incorrect in their thesis. Worst case scenario if NFLX stock falls below my sold puts, I will own shares at a 20% discount from current levels.
I consider this an aggressive trade inside a conservative portfolio. This fits with my underlying macroeconomic assumption is bullish given the global growth and the tax advantages that we have this year.
I know there are risks so I will trim my call profits. This way I can continue to profit, even if NFLX falls sharply. Do not mistake my enthusiasm here for thinking that Netflix is a value play; it is far from it. But when I’m evaluating at growth companies, I am not looking for profitability, but rather sustainability of that tremendous growth, and Netflix has that in excess.
Eventually, Netflix will have stiffer competition from giants like Amazon.com, Inc.(NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Apple Inc. (NASDAQ:AAPL), Walt Disney Co (NYSE:DIS) and Facebook Inc (NASDAQ:FB). But for now, it continues to enjoy the benefits of first mover advantage.
The Trade: Sell the NFLX SEP $250 naked put for $7. This is a bullish trade, where I have an 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $243.
Selling naked puts carries big risk, especially for a stock as expensive and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the NFLX SEP $250/$245 bull put spread. Here, my risk is smaller yet the spread would yield 15% on risk. Compare this with risking $326 to buy the shares and leave no room for error.
Since there are no guarantees when investing in stocks, I never risk more than I can afford to lose.
Learn how to generate income from options 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.