As I’ve said before, if you subscribe to bullish happy endings, Netflix, Inc. (NASDAQ:NFLX) is a buy, end of story. But if you’re mindful, well-loved narratives can become their own worst enemy and a house of cards of sorts. Buying a bullish modified fence in lieu of Netflix stock once again receives our nod for best options strategy. Let me explain.
Blame it on what you will, and with shares of NFLX tumbling by a hefty 5% Wednesday, bullish investors are likely grabbing at straws and seeking reasons to stay the course in Netflix stock. But trying to maintain the faith and supporting a happier story-line could prove trying.
The good news for Netflix bulls is yesterday’s swift blow likely has more to do with general market fatigue and quite possibly fellow FAANG Amazon.com, Inc. (NASDAQ:AMZN). The tech behemoth is back under scrutiny by the Donald Trump administration regarding whether the company is breaking antitrust or competition laws and hurting small business owners.
It’s fair to think the attention aimed at Amazon could be causing Netflix stock investors a bit of anxiety. Trump’s blustery anti-large-cap-technology-business practices rhetoric, which caused panic in the immediate aftermath of the presidential win, may be frightening investors who worry a sequel could be in the works.
Netflix Stock Weekly Chart
If you subscribe to happier endings supported by the price chart, the other good news is Netflix stock still has some of its bullish storyline intact. Unlike AMZN stock which broke below its 50-day simple moving average, NFLX tested and remains stationed above the key institutional support line as of Wednesday’s close. And on the provided weekly chart, bulls can also find solace in the fact Netflix stock is still clearly in an uptrend.
The bad news is that Netflix stock’s own popularity does increase the risk of shares becoming their own worst enemy as investors look to simply take profits.
Bottom line — or squiggly line in this case — NFLX’s uptrend has been driven by increased and likely unsustainable price momentum since breaking aggressively higher out of an existing bullish price channel formed during 2017.
Where does Netflix go from here? With the current correction standing at around 15%, it could be a lot lower. Price consolidations as much as 30% are not uncommon while still being technically healthy. And truthfully, corrections sometimes do go on to become more vicious and longer lasting bear markets as well.
Netflix Stock Bullish Modified Fence
For investors who are bullish on NFLX stock but wish to be more respectful of price risk, a reduced- and limited-risk modified fence still makes sense as a way to position. The combination purchases a call vertical and sells a put vertical in the same contract month to finance the position.
The primary objective is for the call spread to go fully in-the-money with NFLX stock rallying above the vertical. As the combination also minimizes risk relative to shares, this type position can work well for investors’ looking to accumulate Netflix stock on larger price declines.
Reviewing the options board in NFLX stock, one favored modified fence is buying the May $335/$340 call spread and selling the May $240/$235 put vertical for even money or better. If shares are able to narrowly improve the current price trend and hit new highs, above $340 the trader will capture $5 in profit at expiration.
Secondly, if conditions worsen, this spread ensures that risk is contained to $5 below $235. That’s roughly where NFLX will have corrected by 30%. Net, net — being underwater by just over 2% for that size move (or maybe larger) with a position which allows the trader to navigate Netflix’s next earnings cycle in mid-April is a nice option to consider.
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.
