Trading $NFLX Options

| October 16, 2015 | 0 Comments

$NFLXTrading $NFLX Options

Typically, I like to write about general strategies for trading options.  I’ll choose some overarching topic, like using options to trade earnings, and write about broad-based strategies for doing so.  In something of a change for me, I’ve decided to start writing more often about trading options on specific stocks.

There’s growing interest among options traders to learn about more stock-specific trading strategies.  Sometimes a one-size-fits-all approach works with options.  But, often times tweaking strategies based on stocks is the way to go.

As such, we’re going to start off this new series of articles with the highly popular Netflix $NFLX.  As you probably know, Netflix is a widely-used, subscription-based Internet television network.  What you may not realize is just how popular $NFLX options can be.

Okay, so what options trading strategies are good for trading $NFLX options?

Let’s start by looking at Netflix’s stock performance over the last year.

Here’s the chart of $NFLX:

chart of $NFLX performance for the last year

NFLX has been quite the high flyer in recent years.  It’s one of most popular, heavily traded Internet stocks and is often associated with momentum trading.

It’s pretty clear from the chart that NFLX has had a great year.  In fact, it’s up 126% year-to-date.  The stock also split 7 to 1 back in July – another sign of just how high the share price had gotten.

Lately though, the stock has been quite a bit more volatile.  As a matter of fact, the stock has recently plunged below the 50-day moving average on worse than expected earnings news.

So now what? 

Knowing what options strategies to use on NFLX is all about understanding the situation the company is in.

Let’s start with the earnings and why the stock is down.

NFLX isn’t the type of stock that trades based on valuation.  It’s a growth stock, so growth is mostly what investors are paying attention to when earnings comes out.  That being said, NFLX missed growth estimates for US subscribers for this past quarter.

More specifically, the company added 880,000 subscribers in the US compared to the 1.25 million predicted.  That’s quite a big miss.  However, the news was somewhat offset by better than expected international growth.

What’s more, management is blaming the introduction of new chip-based credit cards for the large drop in US subscribers.  Customers who aren’t automatically renewed (because they have a new card number) often don’t renew right away (if at all).

On the other hand, higher programming costs due to NFLX’s focus on original programming also hurt profits.  In fact, profits came in at just $29 million – well below the $51.2 million analysts expected.  Revenues also fell short.

As of this writing, NFLX is down over 8%, so initial reactions to earnings are clearly negative.  Is the selling overdone, or this quarter really cause for alarm?

Either way, I believe this is a good time to use put spreads.  Depending on your view of NFLX, you could go with a put credit spread or put debit spread.  Follow the links for more info on each strategy.

The put credit spread is a bet that NFLX isn’t going to continue to decline.  It could stay neutral or climb for the trade to be a winner.  Basically, you’d be selling a put near-the-money and buying a farther out-of-the-money put.

The short put should be juicy because of the current volatility, so you’ll collect a hefty premium.  The long put serves as protection and makes margin requirement much more reasonable.

This is the strategy you’d use if you think the selling is overdone.  The new chip-card situation is definitely plausible based on my own experience.  Plus, international sales are growing fast and new programming should pay dividends in the future.

However, if lack of growth is a major concern to you (along with falling profits and higher costs), I’d go with the debit spread instead.  NFLX, typically a volatile stock, could certainly continue to fall.  But, puts will be expensive due to the added volatility.

That’s where using a debit spread comes into play.  In this case, you’d sell an OTM put against a near-the-money put to help reduce the cost.  Meanwhile, the payout could still be quite robust, even with reduced risk.

Whether you believe NFLX is going to rebound or keep falling, using put spreads is the way to go.  A credit spread is the best strategy if you think the selling is going to stop.  And, a debit spread makes the most sense if you think the decline is going to continue.

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Trading Strategies

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.