Trading $NFLX Options

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• OPTIONS TRADING

Trading NFLX Options
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• Hi, My name is Steve and Im with Options Trading
  Research, today were reviewing our recently
  published article

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• Trading NFLX Options

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• Typically, I like to write about general
  strategies for trading options. Ill choose some
  overarching topic, like using options to trade
  earnings, and write about broad-based strategies
  for doing so.

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• In something of a change for me, Ive decided to
  start writing more often about trading options on
  specific stocks. Theres growing interest among
  options traders to learn about more
  stock-specific trading strategies.

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• 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, were
  going to start off this new series of articles
  with the highly popular Netflix NFLX.

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• 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.

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

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• Lets start by looking at Netflixs stock
  performance over the last year.
• Heres the chart of NFLX

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(No Transcript)
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• NFLX has been quite the high flyer in recent
  years. Its one of most popular, heavily traded
  Internet stocks and is often associated with
  momentum trading.
• Its pretty clear from the chart that NFLX has
  had a great year.

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• In fact, its 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.

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• 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.

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• So now what?

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• Knowing what options strategies to use on NFLX is
  all about understanding the situation the company
  is in. Lets start with the earnings and why the
  stock is down.

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• NFLX isnt the type of stock that trades based on
  valuation. Its a growth stock, so growth is
  mostly what investors are paying attention to
  when earnings comes out.

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• That being said, NFLX missed growth estimates for
  US subscribers for this past quarter.

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

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• Whats more, management is blaming the
  introduction of new chip-based credit cards for
  the large drop in US subscribers.

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• Customers who arent automatically renewed
  (because they have a new card number) often dont
  renew right away (if at all).

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• On the other hand, higher programming costs due
  to NFLXs 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.

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• 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.

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• 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.

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• The put credit spread is a bet that NFLX isnt
  going to continue to decline. It could stay
  neutral or climb for the trade to be a winner.
  Basically, youd be selling a put near-the-money
  and buying a farther out-of-the-money put.

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

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• This is the strategy youd use if you think the
  selling is overdone. The new chip-card situation
  is definitely plausible based on my own
  experience.

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• Plus, international sales are growing fast and
  new programming should pay dividends in the
  future.

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• However, if lack of growth is a major concern to
  you (along with falling profits and higher
  costs), Id go with the debit spread instead.
  NFLX, typically a volatile stock, could certainly
  continue to fall.

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• But, puts will be expensive due to the added
  volatility. Thats where using a debit spread
  comes into play. In this case, youd sell an OTM
  put against a near-the-money put to help reduce
  the cost.

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• 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.

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• 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.

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