Opportunity: Buy This Stock’s Dip

This week has been volatile for stock prices. The White House escalated its rhetoric against China by threatening to limit Chinese Investments in the U.S. This is in addition to the already worrisome global tariff wars.

So it is understandable that equity prices have suffered as a consequence. Investors want to get out of the way of the potential downside, especially when we are so close to all-time highs.

Netflix (NASDAQ:NFLX) is a momentum stock and those move faster than most other stocks.

When they’re on the way down, they look like they’re headed into an abyss … therein lies an opportunity to profit from what others fear.

Momentum stocks like NFLX rarely give a clear point of entry, which makes them difficult to trade.

So I use options where I can to eliminate the need to be surgical with my timing.

This enables me to set a bullish trade with plenty of room for error.

Fundamentally, NFLX is an expensive stock with a price-to-earnings ratio of 230. This is more than 10 times that of the Apple (NASDAQ:AAPL) or Facebook (NASDAQ:FB). But it’s also a hyper growth stock. For stocks like that, I don’t look for value for as long as they are delivering on expansion. And Netflix delivers on that in droves.

So it comes down to the fact that we are still in a bull market where Netflix stock can thrive. The company’s global expansion has been phenomenal so far and it’s likely to continue. NFLX’s first-mover advantage is great, but they do have stiff competition from major media companies like Disney (NYSE:DIS). However, the company is delivering great content which should keep it ahead of the game.

As we get more accustomed to streaming our content rather than watching it on TV, I believe there’s plenty of room for all media to thrive, especially NFLX. Its management team is confident and proven and, more importantly, Wall Street loves it.

So, for now, I believe that proven support levels will also hold up to the test of 2018. If I’m wrong, the worst case scenario in this trade setup is that I would own NFLX stock at a deep discount from its current levels. If so, then I believe that I can manage out of my position in the long-term for a profit.

This is a rinse and repeat trade for me, so I come at it with profits in pockets already.

The Bet: Sell the NFLX SEP $285 put. This is a bullish trade for which I collect $5.50 to open. I have a 85% certainty that I will retain maximum gains. But if the price falls below my strike, then I own shares. I would then need to manage off my breakeven point of $279.50.

Selling naked puts carries big risk, especially for a stock as frothy as NFLX stock. For those who want to mitigate it, they can sell a spread instead.

The Alternate Bet: Sell the NFLX SEP $285/$280 bull put spread, where I have the same odds of winning. The spread here would yield 12% on risk.

— Nicolas Chahine

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Source: Investor Place