Do you have a Netflix account? Actually the better question might be who doesn’t have a Netflix account? Me and every single person I know have one and are usually paying for someone else to have one, too. I’m quite bullish on the service. With more than 125 million U.S. subscribers, there is a very good chance that almost everyone you know also has a Netflix account.
NFLX started 2018 at $201 but has doubled in the first six months to as high as $412. This kind of stock growth, while certainly appealing for your account and exciting to watch, can lead to potential pitfalls.
NFLX has earnings on July 16, and has historically been a big mover into and after earnings. So if you’re looking for a way to play the run-up (or down) to earnings, I have two potential option trades to suggest, both with a high probability of profit.
Because of the historically large moves in and around earnings, NFLX has very high option prices right now. They’re 86 percent of the high on the year, meaning we would look to sell the option premium rather than buy it. Remember the old stock-trading adage: Buy low and sell high?
Let’s consider a bullish trade. You’ve decided the trend is your friend and want to go long into earnings. One could sell a 372.5/370 Put Spread in the July cycle, which expires four days after the earnings event. By selling the 372.5 Put and buying the 370 Put, we are taking in a credit of $85 and limiting our potential losses in the trade to only $165. This trade, with the 372.5 Put at a 30 Delta means it has approximately a 70 percent probability of profit.
Maybe you’re more of a contrarian and feel that the doubling of NFLX in the first six months is a price extreme. You’re ready to get short, just as soon as you get done binge-watching Martin Short. One could sell a 435 Call and buy a 440 Call. The option strikes are further apart on the call side, which says to me there is less demand for call volume than on the Put side. The 435/440 Call spread would take in $117 as premium on the trade and the max risk would be $383, which is still less than one share of NFLX. This trade has approximately a 70% percent probability of profit with the 435 Call at the 30 Delta.
With one share of NFLX at $400, these types of credit spread trades make so much sense for the amount of leverage they provide while still being able to mitigate risk. The breakeven is at $371.65 on the Put spread, which is nearly 7 percent lower than the current price. The Call spread is even further away at $436.17, or 9 percent higher than the current stock price.
Either one of these setups has a high probability of profit and could help fund your next few buckets of popcorn when you get ready to “Netflix and Chill.”
Christopher M. Uhl, CMA, MOSM