Trading Strategies on Netflix (NASDAQ:NFLX) as it Continues to Outperform

Netflix envelopes Early Tuesday, brokerage firm Caris lifted its 12-month price target on Netflix NFLX to $130 from $120 (roughly a 20% advance from current levels). Monday, at Apple’s AAPL much-anticipated Worldwide Developer Conference, NFLX officially announced what has been speculated for months – a free app that will allow streaming video across various Apple devices for NFLX customers. Caris points out that the 20 million iPhone users in the U.S. may help grow the Netflix customer base.

NFLX shares have been in uptrending mode since the last quarter of 2008, more than quintupling in value over the last 18 months or so. While the broader market has given back more than 11% since late April, NFLX has continued to chug higher, up more than 5% during the past six weeks. The stock’s uptrend has slowed down, but the overall outperformance continues.

Investors who think the “trend is their friend” and who want to follow Caris’ bullish thesis might wish to take advantage of the leverage that option strategies can prove. Those who feel the uptrend is petering out and who wish to take a contrarian approach may also want to explore an option strategy. Two hypothetical option strategies on NFLX – one bullish, one bearish – are described below. Remember these serve as examples, not recommendations. Consider your own risk/reward parameters and personal trading goals before executing any new trades.

Want to learn more about different options strategies or the OptionsHouse platform? Stop by our events page to review our schedule of free weekly webinars and sign up for one that interests you. Next week’s Tuesday strategy webinar is a look at the short-call strategy.

*Prices given as of Tuesday afternoon. NFLX is trading at $108.95

Bullish Option Strategy: Bull Call Spread

Traders who expect modest upside in Netflix between now and September could consider buying a bull call spread. The September 80/110 call spread is currently priced for a net debit of $19.50 (buying the 80 call, selling the 110 call). If NFLX shares are trading above $110 at expiration on September 17, the maximum profit is $10.50 per spread. The maximum loss, meanwhile, is limited to the debit paid and occurs if NFLX has fallen below $80 by the time these options expire. Breakeven is $99.50 at expiration, an 8.6% drop from current levels.

With bull call spread and all strategies we cover in this column, the trader has the prerogative to exit the trade between execution and expiration. For this reason, the value of the spread may change between now and September 17 because of a move in NFLX shares or a change in implied volatility.

Profit/Loss of Netflix (NFLX) bull call spread

Bearish Option Strategy: Bear Put Spread

The contrarians among us that expect some longer-term hiccups ahead could buy a bear put spread. The December 85/75 bear put spread can be traded for a net debit of $3.00 by buying the 85 put and selling the 75 put. If NFLX has not dropped below $85 by the time these options expire, the maximum loss investors will face is the $3.00 premium paid. If the stock drops lower than $75, however, the maximum potential gain is $7.00. Breakeven for this bearish spread is $82, or a decline of nearly 25% from current levels.

Profit/Loss of Netflix (NFLX) bear put spread