In spite of all the headline risks that looms over the stock market this year, the indices made new highs … but there have been a few exceptions, and Netflix (NASDAQ:NFLX) is one of them. This is a momentum stock, which makes it hard to trade. On the way down it seems like it’s falling into an abyss, making it a scary knife to catch. The same is true of Tesla (NASDAQ:TSLA).
So it’s no coincidence that they both have had a rough going of late. Netflix stock found footing as it approached $300 per share, so it solidified the last consolidation zone it had this year. And therein lies an opportunity to create income without any out-of-pocket expense.
We still have global tariff war threats. In fact a comment period expires tonight, which makes it probable that we will have another wave of U.S. tariffs against China. Those will undoubtedly solicit an immediate response from China, and the stock market will not like that.
So buying the upside hopium in momentum stocks like Netflix is risky. Instead I am comfortable betting that the downside support will hold through 2018.
Other than the headline shocks, the macroeconomic thesis for 2018 remains optimistic. Companies are reporting strong profit and loss statements and interest rates are still low enough that businesses should continue to thrive for months.
Netflix management continues to deliver exponential growth. They have overcome all the hurdles and their global expansion looks incredible. Yes, they are spending a lot of money but the content they are producing is grabbing people’s attention. This is a growth company after all so they are supposed to spend in order to grow. Think Amazon (NASDAQ:AMZN) as an example. So for now, value is not what I’m looking for.
Today’s trade is to bet on the price action behind the future promise of Netflix. If the stock market in general holds up, then so will Netflix stock. Year-to-date it’s up 70%, which is double that of Apple (NASDAQ:AAPL).
Technically, the bounce in late August delivered the ideal upside potential up to $380 per share. The last three days have been bad but they are also part of the natural process of price action. So a few red candles do not change the underlying thesis.
I am confident that if I owned Netflix at another 15% below its current price, I will manage out of the shares for profit. So I want to use the elevated fears in the options market to sell downside risk against what others fear.
The worst-case scenario for me is that I will own Netflix shares at a deep discount. At some point, management will have to change their ways with regards to spending, but that is years away. For now Wall Street will give it a pass on profitability for as long as they deliver on growth.
NFLX Stock Trade Ideas
The Trade: Sell NFLX Oct 12 $305 put. This is a bullish trade for which I collect $3.50 to open. I have a 90% certitude that I will retain maximum gains, but if the price falls below my strike then I own shares. I would then need to manage off my breakeven point of $301.50.
Selling naked puts carries big risk, especially for a stock as frothy as NFLX. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the NFLX Oct 12 $305/$300 credit put spread which would deliver over 15% in yield but with much smaller risk. Both setups have about the same odds of success and neither requires a rally to win.
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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.