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Go Long Netflix, Inc. (NFLX) Stock Despite Q2 Earnings Uncertainty

Nicolas Chahine

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

The days of being tied to a cable box are long gone. Netflix, Inc. (NASDAQ:NFLX) played a large role in that. I remember the days where it was merely an alternative way of renting movies. Now, Netflix is a media giant, and NFLX stock has made a lot of people a lot of money.

Source: Via Netflix

What I don’t like about Netflix, however, is what every other analyst loves about it: its management’s attitude towards competition. While it’s undeniable what Netflix has accomplished, I think management is committing a cardinal sin, even now. It’s not respecting the power of mega-competition that is knocking on the door.

Netflix stock is near highs because of the potential that management promised they can deliver on the global stage. I am not smart enough to evaluate how the overseas expansion will compare to that here in the U.S. But I am smart enough to know that they should pay attention to who is nipping at their heels.

Ignoring a legitimate threat is irresponsible. Just ask the management teams of the struggling retail industry. They failed to respect the Amazon.com, Inc. (NASDAQ:AMZN) threat until it was too late. Now, many brick-and-mortar retailers have been decimated, and their stocks are mere slivers of what they once were.

Netflix management worries me because they are too lax at least on the surface about their supremacy in the streaming media arena. This is especially true since AMZN is not the only threat. There are even bigger giants lurking inches behind. Alphabet Inc (NASDAQ:GOOGL), Facebook Inc (NASDAQ:FB) and Apple Inc. (NASDAQ:AAPL) all three have deep pockets and they are getting in the video content game in a big way. They all have multi-billion-user platforms from which they can really put the hurt on NFLX.

Finally, let’s not forget traditional media. They too have the resources and content to chip away at Reed Hastings’ company.

In spite of my personal opinion of the long-term future of Netflix, I am a strong believer in shares’ price action. NFLX stock has proven time and time again that its fans will step in and support it on dips. So usually I like to take positions against the trend as long as the fundamentals support it. Case in point: My last trade on NFLX delivered a fat profit with no money out of pocket.

NFLX stock chart


Click to Enlarge 
Today, while there is no downside whoosh against which I can sell risk, Netflix will report earnings tonight (Monday). The short-term trader reaction to the earnings is a binary event, and that elevates uncertainty, thereby creating premium selling opportunities that fit my trading profile.

The trick is to find levels where price is not likely to go and sell risk there for income.

Essentially, we want to sell someone a lotto ticket that’s designed to be a loser so we can profit from its decay as time elapses.

Let’s look at the trade.



How to Trade NFLX Stock Here

The bet: Sell the 11 Aug $140 put and collect $1.50 to open the risk. Here, we have a 90% theoretical chance of success where we can retain the whole premium for maximum gains. Just note that if Netflix shares fall below our strike price, we’ll have to buy the stock, then could accrue losses below $138.50.

Selling naked puts requires a lot of margin to secure it. We can mitigate the risk by limiting its size. To do that, we would buy another put lower than the one we sold, and of the same time and size. This way the margin requirement will be less than the width of the spread.

The alternate bet: Sell the 11 Aug $141/$139 credit put spread, where we have roughly the same chance of success, but with less money on the line. If successful, we’ll still earn a respectable 15% yield. This looks even more attractive when you consider that the alternative is buying NFLX stock at face value, then hoping it rallies 15% just to match the spread’s performance.

We are not required to hold our positions open through their expiration. We can close any of them for partial gains or losses at any time.

Investing in stocks is always risky, so never bet more than you can afford to lose — especially around earnings.

Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

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