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Why You Should Sell Puts on NFLX

Pass on going long this "cult stock"


What are you going to do as a trader and an investor about Netflix (NASDAQ:NFLX)?

As an investor, don’t even think about it. The company is competing with Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL), consortia of studios and other content providers, cable companies and telecommunication companies distributing digital media – sort of like bringing a knife to a gunfight – over the long haul. It sells for 118 times trailing earnings and over a five year period will see costs rise much faster than its subscriber base. Not a good thing.

On the other hand, I and millions of other people love NFLX, especially the streaming service. I have just finished 10 seasons of MI-5 – great series. Relax, BBC seasons have only half the episodes of the U.S. series. I’ve also begun Foyle’s War, another BBC production, which may be the best thing I have ever seen produced on an ongoing basis for television. Yes, I am an Anglophile – even got to the Olympics.

Where am I? Netflix – the stock. The distractions I referenced in the last paragraph are the feeling many traders and even some investors feel about what is truly a cult stock. And that has pushed the stock way up – after it fell way down – and that volatility means the options are expensive to buy but a joy to sell.

Earnings come out on Jan. 23, a few days after January puts expire, and I believe the fourth quarter will be a one-off and the company will see a noticeable rise in subscribers. Why? Consumers hit bottom a while ago, trimmed all that can be trimmed and are back to spending more money on cocooning – more stuff at home because it’s cheaper than going out. Recent ChangeWave research (part of the 451 Group) surveys on electronics purchased for the home bear this thesis out.  And if you are willing to take the risk of owning a company with a less than bright longer-term future, NFLX puts can generate a lot of cash for holiday spending.

Recommendation: If you sell a NFLX Jan. $80 put – the stock is just shy of $90 as I write this – you can generate almost $3 in cash, $300 a contract, a 3.33% return or a 33% annualized return. The $80 level appears to have attracted a lot of technical support, especially in terms of volume. And these puts do expire before earnings come out. That being said, you can always be put the stock at this price.

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