Few stocks behave like Netflix, Inc. (NASDAQ:NFLX). During a time when the stock market is nervous about tariff wars and geopolitical risk and rising rates, Netflix stock manages to be up 60% year-to-date when the S&P 500 is flat. This is a strong statement by the NFLX bulls and one that is likely to continue. And therein lies my opportunity.
To properly frame this trade, my view on the stock market in general remains positive. I believe traders are reacting negatively to headlines that won’t change the underlying fundamentals.
So the bear thesis is thin without transient headlines.
This malaise shall pass and if that’s the case then NFLX stock will lead higher.
This is a momentum stock, and these usually run faster in both directions.
It’s currently bumping along its highs from higher lows.
This often results in a breakout. I would not be surprised to see Netflix above $350 per share in the next few months.
Clearly I am optimistic, but cautiously so, meaning I don’t want to risk $332 per share to buy the stock outright with absolutely no room for error. So I use options where I can lower my out-of-pocket expense thereby giving me better conviction in my trade on red days. Eventually the stock will rally and I will profit. We are trading in headline mode and we could get a tweet at any moment that causes dips like the one this morning. Using options allows me to wait them out more comfortably.
Fundamentally, NFLX is not cheap. It sells at a 265 price-to-earnings ratio but for mega growth companies like that investors should not be looking for value. As long as management continues to deliver the phenomenal growth they have been, investors will continue giving them a pass on valuation.
We saw the stock spike when management said they will spend billions of dollars, so clearly Wall Street does not care about its financial model for the time being. This is similar to the Amazon.com, Inc (NASDAQ:AMZN) situation but not quite. Amazon burns its own cash whereas Netflix does not.
Technically, NFLX is so close to a new high, that if we get one big move in the stock market in general it would trigger a technical breakout that will bring $350 per share it in a flash. Timing is an issue and I can control that in options. This is a pair trade where I buy the upside potential but I also sell risk into proven support to finance my purchase.
NFLX Stock Trade Idea
The Upside Potential Bet: Buy the NFLX Dec $360/$370 debit call spread where I have the chance to more than double my money if the stock rallies through my spread.
To eliminate my out-of-pocket risk I sell downside risk into support. This creates risk where if support fails I would own shares at a discount from here.
The Bank: Sell the NFLX Dec $230 put. This is a bullish trade for which I collect $5 per contract to open.
The results of both trades results in a net credit, so I am a winner already. As long as price stays above my puts, any premium I collect from selling my call spread is incremental profits.
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Source: Investor Place