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Netflix Is a Buy Anytime It Drops to $350

  • Netflix (NFLX) still has pricing power
  • Shares have been cut in half from last November
  • Selling expensive put options to be paid now to be a buyer at lower level
the netflix logo displayed on a tablet that a person is holding while laying down
Source: Kaspars Grinvalds / Shutterstock.com

Shares of Netflix (NASDAQ:NFLX) look to have found some semblance of support after a serious sell-off. NFLX stock finally bounced at the $350 area on three separate occasions. Look for continued consolidation in Netflix over the coming months.

Continued Incremental Price Increases

Netflix raised prices earlier in the year by a few bucks a month, depending on your plan. This was similar to the price increases from October 2020. The fear of losing customers from that previous increase was way overblown as Netflix added subscribers.

I expect continued slow but steady bumps in the monthly subscription rate over the coming years. Important to remember that the last earnings report that torpedoed the stock didn’t completely reflect the new price increase and additional revenue it generated.

NFLX Netflix $377.72

Mark Hake CFA, recently took a deep dive into the fundamentals for Netflix. He feels that investors fears are overblown and has a $599 price target on the stock. Mr. Hake also alluded to the pricing power that Netflix enjoys.

The analysts surveyed by TipRanks have a similar bullish outlook on NFLX stock. The consensus price target of the 35 analysts surveyed is $515.57. The highest estimate of $700 while the lowest is $342.

Technical Take On NFLX Stock

Netflix has been cut in half since making all-time highs at $700 last November. Shares are now back at exactly the same level they were back in April of 2020 which marked the beginning of a massive rally. This type of horizontal, or what I term “eyeball” support, tends to carry more importance than other support areas. Three recent attempts to break it in a significant way all failed as well.

Source: Courtesy of the thinkorswim® platform from TD Ameritrade

Tyler Craig from Tales of a Technician had a bearish viewpoint on NFLX stock back on March 14. Netflix was trading at $340 at the time. His analysis was predicated on Netflix continuing the prolonged downtrend post-earnings. This proved to be the case for only one more day. March 15 turned out being the bottom for the stock.

NFLX has since broken the downtrend line and re-taken support. This lends further credence to $350 being a major line in the sand for the foreseeable future.

The point is not to beat up Mr. Craig. I have had numerous incorrect calls in my long career and will continue to have them down the road as well. Welcome to the wonderful world of trading.

The point is that when the bears get proven wrong at such a critical juncture it almost always ends up being an intermediate term low in the stock.

How To Trade It Now

Implied volatility (IV) is still quite high in NFLX stock options. It currently sits at the 75th percentile even followings earnings. IV is also very expensive versus the historic volatility reading at the 34th percentile. This means option prices are overly rich and favors option selling strategies when constructing trades.

So to position to be a buyer of NFLX stock at lower levels selling an out-of-the-money bull put spread spread makes probabilistic sense.

Sell June $340/$335 put spread for $1.50 net credit

Maximum gain on the trade is $150 per spread. Maximum risk is $350 per spread. Return on risk 42.85%. The short $340 strike price provides a 9.3% downside cushion to the $374.59 closing price of NFLX stock. It is also structured well below the major support area at $350.

Chasing Netflix stock, or stocks generally, at current levels may be unwise. It will likely pay to be patient and wait for stocks to come back down after the recent red-hot rally. Selling puts and put spreads to get paid now for that patience will pay off.

On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2022/04/nflx-stock-is-a-buy-anytime-drops-to-350/.

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