Netflix (NASDAQ: NFLX) has certainly had a tough time of it recently. After being one of the best performing internet stocks in the first half of the year, NFLX stock has crashed back to reality. Shares dropped more than 20% from the recent all-time highs following earnings on July 16th. Certainly some of the sell off was warranted given the disappointing subscriber growth and ongoing cash burn. But the magnitude of the selling has now gone too far. Look for NFLX stock to head higher over the coming months.
While subscriber growth was undoubtedly a big miss in the latest earnings report, it is important to note that earnings actually beat estimates at 86 cents versus 80 cents consensus. Guidance for third-quarter subscriber additions was lowered to 5 million from a previous estimate of 6 million — but that is still 5 million new subscribers. While growth has undoubtedly tempered, Netflix is still definitely growing.
NFLX stock is looking decidedly better from a technical basis. Shares of NFLX reached the most oversold levels of the year before bouncing hard yesterday. The 9-day RSI breached the 20 area with a reading of 19.57 before jumping sharply. Netflix held the critical $310 support area which was the springboard to the last big rally. The 200-day moving average at $294.19 should also lend additional downside support.
More importantly, NFLX stock had a key reversal yesterday. After opening lower and then trading down to new recent lows at $310.93, shares reversed course and rallied big time to close higher by nearly 11 points , or 3.47%, on the day. Today, the action is continuing, which Netflix up an addition 3.95% so far. This type of price action, especially following such a sharp sell off and near major support, is often a reliable indication that the sellers may finally be exhausted.
Implied volatility (IV) in NFLX options has gotten comparatively inexpensive, trading at the 29th percentile. This means option prices are fairly cheap, favoring long option strategies when constructing trades. So to position for a pop in NFLX stock, a call debit spread makes probabilistic sense.
NFLX Stock Trade Idea
Buy NFLX Oct $340 calls and sell NFLX Oct $345 calls for a $2.20 net debit
Maximum risk on the trade is $220 per spread. Maximum gain is $2.80 per spread, or 127%, if NFLX stock closes above $345 at October expiration. The short strike is structured at the first level of overhead resistance at the $345 area.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
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