Netflix has surely paid for their price increases and especially how they communicated those price increases to the public. The public and investors responded by trashing the stock price. From around the middle of July to today, the stock has fallen from around $300 to the current level of $129. Buyers haven’t jumped in much yet, but it’s worth considering potential bullish trades if you feel the beating is almost over. Here are a few trades that look interesting to me. There was a saying in the pits, “ Don’t try to catch falling knives”, picking bottoms isn’t easy! If I was to jump in on one of these trade ideas, I would probably scale in, starting at about 1/3 of my intended size.
#1 Sell 1 November 85 put for around $3.00 ( stock around $129.70 as I’m writing this). Trade is neutral to bullish.
I would only do this trade if I was comfortable owning NFLX stock if I got assigned. In other words, I have to have a neutral to bullish outlook on NFLX over the next 6 months if I am going to do this trade. The implied Volatility levels are jacked at over the 100 level. By selling the puts at $3.00, I am committing to buying the stock at $82.00! (strike price of 85 minus the put premium of $3.00). If I’m not comfortable owning NFLX at $82.00 if I get assigned, I wouldn’t do this trade. What would I do if I get assigned? I would start selling at-the-money or out-of-the –money calls against my long stock. What if I don’t get assigned? I would collect the premium of $3.00 and if my outlook on NFLX was still neutral to bullish, I would go 30-60 days from expiration and do it again.
#2 Buy 1 November 125 call and sell 1 November 30 call. NFLX was around $129.70 when looking at this trade – and slipping). Trade is neutral to bullish, I’d be looking to initiate for a net debit of around $2.30.
Why would I consider this trade? Because I can do well if the stock is neutral ( doesn’t go up). At expiration, if stock is 130 or over, the potential yields are very high because of the pumped up implied volatilities. The risk / reward is a little better than 2:1 and I do well in 2 of 3 scenarios, neutral and bullish. What would I do if NFLX went down? If NFLX went down under 123 or 124 over the next 25 days I would probably considering exiting. At that point my losses would be far less than they would be if NFLX was at the 123-124 area at expiration. At expiration you would lose entire debit, in 25 days at the 123-124 area I would approximate my losses to be around 10-15% on the cost of my spread.
That’s my 2 cents for the day ( my Irish mother used to say this), have a wonderful weekend!