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Netflix $NFLX can be a volatile stock to trade, so here’s some advice on how to trade $NFLX options.
$NFLX
#optionstradingstrategies
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4. Hi, My name is Steve and I‘m with Options
Trading Research, today were reviewing
our recently published article…
6. 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.
7. 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.
8. 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.
9. 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.
10. Okay, so what options trading strategies
are good for trading $NFLX options?
11. Let’s start by looking at Netflix’s stock
performance over the last year.
Here’s the chart of $NFLX:
12.
13. 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.
14. 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.
15. 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.
17. 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.
18. 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.
19. That being said, NFLX missed growth
estimates for US subscribers for this
past quarter.
20. 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.
21. What’s more, management is blaming the
introduction of new chip-based credit
cards for the large drop in US
subscribers.
22. Customers who aren’t automatically
renewed (because they have a new card
number) often don’t renew right away (if
at all).
23. 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.
24. 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.
25. 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.
26. 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.
27. 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.
28. 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.
30. 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.
31. 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.
32. 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.
33. 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.