If you've read me for a while, you know that I have my concerns about the battle between the long-term prospects of Netflix, Inc. (NASDAQ: NFLX ) versus the outrageous valuation of NFLX stock. My biggest worry is that eventually, Amazon.com, Inc. (NASDAQ: AMZN ) will severely pressure Netflix's P&L.
But, for the short term, I think it's easier to trade Netflix's price action than it is the fundamentals.
First, we have an uber-bullish equity market. Add to that the cult following in Netflix stock, and you have something that needs a big reason to break down. Unless we get a general market correction, we don't have an environment conducive to NFLX faltering in a big way.
Click to Enlarge Technically, I like the way NFLX stock is behaving. It's setting higher highs and knocking on roofs. It already blew through my recently set targets, but I don't think it's too late to squeeze out another bullish trade.
I will submit that the fundamental argument over the value of NFLX stock is debatable. So I revert to the technical aspect. Recently I wrote about how to reap free profits from trading Netflix . That trade is still in play, but I feel like I need to skew my position to more long than short. So I can reset another trade to help me achieve just that.
How to Trade NFLX Stock Right Now
The bet: Sell the NFLX Sep $100 put for $3.50 per contract. This trade has a 90% theoretical chance of success with a 30% buffer from current price. My breakeven price is $96.5 per share.
If Netflix stays above $100 through September, then someone bought a losing lotto ticket from me and I get to keep the premium. If NFLX stock falls below $100 while the position is open, then I could be put the stock. I start to accrue losses below $96.50 per share.
I only sell naked puts if I am willing and able to own the stock at the strike sold. In this case, and if I am assigned the stock at $100 per share, it would mean that I bought Netflix stock at a 30% discount from today's prices.
Selling naked puts is not suitable for all risk profiles or account sizes. I could change the trade to being a sold put spread (also called a bull put spread) to better suit more traders.
The alternate: Sell a NFLX Sep $100/$95 credit put spread for 75 cents per contract. But in this case, my max loss is finite, so margin required is fixed. The trade still has a 90% theoretical chance of success with a 16% potential yield as a reward. NFLX would still need to fall 30% to reach my sold risk level.
I did mention that NFLX is looking frisky from the technical perspective. So someone who wants to capture that potential can allocate some of the premium collected for selling the puts to buy a bullish call position. This can be done with a March debit call spread at $140 for a chance to double your money.
Personally, I will opt out because I want to trade Facebook Inc (NASDAQ: FB ) and AMZN. I don't want to be too heavy on the mega-cap tech.
I am not required to hold any options positions open through expiration. I can close any of them for partial gains or losses.
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 on Twitter at @racernic and StockTwits at @racernic .
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