If you’re in the market for a buying opportunity (and who amongst us isn’t?), it’s time to focus the camera lens on Netflix (NASDAQ:NFLX). Disclaimer: I can’t guarantee a picture-perfect NFLX stock trade, but I can suggest an appropriate options trade (in this case: a butterfly spread) for the situation. Let me explain:
Two weeks ago, Netflix delivered an upside earnings surprise but missed on subscribers and reduced guidance. This has brought Netflix’s dominance into question. Is the moat shrinking as Amazon (NASDAQ:AMZN), Disney (NYSE:DIS) and more wait in arms for Netflix to burn through its cash?
Wall Street is free to debate that. For sidelined investors, this doomsday narrative offers a decent (technical-based) buying opportunity … at a little to no cost! Let’s look at the chart:
Netflix Stock Weekly Chart
At its recent highs, this summer shares of Netflix were up about 125%. What’s more, 2018’s incredible run is on top of 2017’s gainer of around 55%. Having said that, it’s hard to blame a bit of aggressive profit-taking as it happens to even the best and most loved stocks.
Following the selloff, NFLX stock is testing a proven breakout support pattern. Overall, it’s a decent spot within the existing uptrend to take a shot on NFLX stock. I wouldn’t buy shares outright, however, and I’d refuse the temptation of opening up an options position with increased downside risk.
Why? All stocks eventually correct. Considering Netflix’s massive gains — and even riskier high-base count established over the past couple years — a 22% correction could quickly move toward 30% while still being viewed as healthy and par for the course. In fact, for a growth stock of Netflix’s caliber whose business prospects are being called into question, a corrective decline of 35% to 40% shouldn’t be dismissed as unreasonable.
NFLX Stock Moderately Bullish Butterfly
For investors that see the value in getting long NFLX stock as it tests technical support, but realize there may not be an imminent happy ending to today’s bearish script, a well-placed and lower cost butterfly looks appropriate.
Reviewing Netflix’s options, one butterfly of interest is the Sept $355/$375/$395 call combination priced for $2.65 with NFLX stock at $337.45. The placement of strikes allows for an attractive profit zone from $357.65 to $392.35 at expiration.
The range works well technically as the spread only begins to make money if NFLX does show signs of reaffirming its uptrend. If that occurs the sweet spot for this strategy is $375. A trader could capture as much as $17.35 if Netflix shares land on the center strike on the third Friday in September.
Also, unlike some other strategies this trader’s downside exposure is limited to the small debit, which works out to roughly the equivalent of 0.80% of NFLX stock. That’s nice insurance in the event of a larger correction.
Bottom Line on NFLX Stock
The real cost for bullish investors using this strategy is accepting the possibility of a loss if Netflix moves aggressively higher. Ultimately, if shares rally through $395, the debit of $2.65 would be forfeited. However, while I believe in the possibility for happy endings, a full-blown earnings gap fill is not something I see as being in the script for Netflix stock anytime soon.
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.
