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Netflix Inc NASDAQ: NFLX-Q

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2 Bull Put Spread Trade Ideas For NFLX This Friday

Barchart - Thu Nov 18, 2021
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Netflix (NFLX) is one of the strongest stocks in the market right now with the stock up 41.47% in the last six months. The Barchart Technical Opinion rating is a 100% Buy and ranks in the Top 1% of all short term signal directions. Long term indicators fully support a continuation of the trend. However, the market is approaching overbought territory. Be watchful of a trend reversal.

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Netflix is the world's leading Internet television network with millions of subscribers in nearly 50 countries who have access to an ever-expanding library of TV shows and movies, including original programming, documentaries and feature films. The company offers the ability to watch as subscribers want, anytime, anywhere, on nearly any Internet-connected screen.

Rather than just buying the stock, investors can use the options market to find smart ways to trade Netflix stock with an attractive risk to reward ratio. Implied volatility is high at around 29%. The twelve month low for implied volatility is 21% and the twelve month high is 49%. The IV Percentile is 41%. That means it could be a great time to be a seller of options on NFLX. That coupled with the potential bullish action makes it a great candidate for a bull put spread. Today, we’re going to look at a couple of bull put spread trades with different expiration dates.

Here are the parameters for finding some bull put spread trade ideas on NFLX.

  • Max Profit 25% to 50%
  • Probability 25% to 50%
  • Symbol equals Netflix
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Here are the results of that particular screener:

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Let’s analyze some of these ideas.

Bull Put Spread 1: February 620 – 585 Bull Put Spread

As a reminder, A bull put spread is a defined risk option strategy that profits if the stock closes above the short strike at expiry. To execute a bull put spread an investor would sell an out-of-the-money put and then but a further out-of-the-money put.

Let’s use the first line item as an example. This bull put spread trade involves selling the February expiry 620 strike put and buying the 585 strike put.  Selling this spread results in a credit of around $7.00 or $700 per contract. That is also the maximum possible gain on the trade. The maximum potential loss can be calculated by taking the spread width, less the premium received and multiplying by 100. That give us:

35 – 7 x 100 = $2,800.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 25%. The probability of the trade being successful is 76.90%, although this is just an estimate. The spread will achieve the maximum profit if NFLX closes above 620 on February 18, in which case the entire spread would expire worthless allowing the premium seller to keep the $700 option premium. The maximum loss will occur if NFLX closes below 585 on February 18, which would see the premium seller lose $2,800 on the trade.  The breakeven point for the Bull Put Spread is 613 which is calculated as 620 less the $7.00 option premium per contract.

Bull Put Spread 2: June 590 – 540 Bull Put Spread

Let’s take the fourth line item as our next example.  This bull put spread trade involves selling the June expiry 590 strike put and buying the 540 strike put. Selling this spread results in a credit of around $10.60 or $1,060 per contract. That is also the maximum possible gain on the trade. The maximum potential loss can be calculated by taking the spread width, less the premium received and multiplying by 100. That give us:

50 – 10.60 x 100 = $3,940.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 26.90%. However, we have to wait an extra four months to achieve this return. The probability of the trade being successful is 76.30%. The spread will achieve the maximum profit if NFLX closes above 590 on June 17, in which case the entire spread would expire worthless allowing the premium seller to keep the $1,060 option premium. The maximum loss will occur if NFLX closes below 540 on June 17, which would see the premium seller lose $3,940 on the trade.  The breakeven point for the Bull Put Spread is 579.40 which is calculated as 590 less the $10.60 option premium per contract.

Mitigating Risk

With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you. For a bull put spread, setting a stop loss of 25% of maximum risk is a good idea. In the first NFLX example above, that would be a loss of around $700. For the second example, the stop loss would be around $985

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, Nov 17, 2021.

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