Option Strategies in Netflix (NFLX) as the Stock Eyes $200

Netflix option strategies The seemingly unstoppable force which is Netflix NFLX continued higher on Tuesday even while the broader market reversed sharply lower in early trading. Yesterday, the company launched a streaming-only video subscription plan and upped the prices for its DVD mail delivery plans. These business decisions were received well on Wall Street and the stock easily cruised to a new all-time high. In fact, Oprah declared Netflix as one of her favorite holiday things!

NFLX is up almost 250% in 2010 and is higher by roughly 570% in the past five years. There are typically two schools of thought when it comes to a powerfully trending stock such as NFLX. One follows the “trend is your friend” mantra and believes an outperforming stock can continue to power higher until there is a palpable fundamental shift.

The other (possibly more cautious) sect thinks outperformance can go hand-in-hand with an overbought condition. The axiom here is that what comes up must come down, and may come down quickly. Not to mention, with NFLX trading near $200, the number of investors who can afford 100 shares of stock (that's $20,000) has grown smaller.

For Netflix bulls and skeptics out there, we've detailed two potential option strategies below – one bullish and one neutral. These strategies put less total capital at risk than buying or selling the shares outright. Descriptions are for educational purposes only and are not buy/sell/hold recommendations. All prices are as of Tuesday midday, when NFLX shares were at $189.92, up $1.60 on the day.

Bullish Option Strategy: Bull Call Spread

Investors who feel Netflix will continue to power higher – at least in the short term – could consider a bull call spread in the December series. The December 190/200 long call spread can be bought for a net debit of $3.95 by buying the 190-strike call and selling the 200-strike call in order to offset some of the cost of the long call.

At expiration on December 17, the most the investor can lose is this $3.95 premium paid, should NFLX be trading below $190. The maximum potential gain, on the other hand, is $6.05, which is the difference in strike prices less the premium paid. The maximum gain would occur at or above $200 in the stock. The call spread would expire with a value of $10.00less the $3.95 originally paid for the spread. This is a potential return on risk of 153%.

Breakeven at expiration for this spread is $193.95 (long strike plus debit). If NFLX is trading anywhere above this level when the options expire, the spread will be profitable. This represents a move of just over 2% from the stock's current levels. The December at-the-money (190 strike) straddle is currently priced at $19.40, suggesting the market is pricing in a move of $19.40 (higher or lower) within the next 24 days until expiration. On a percentage basis, this is an advance (or decline) of roughly 10%.

Profit and loss of Netflix (NFLX) bull call spread

Neutral Option Strategy: Iron Condor

Those who are of the opinion that NFLX may stay range-bound through the end of the year could sell an iron condor as a way to potentially generate income while awaiting the stock's next move. The December 160/170/210/220 condor can be sold for an overall net credit of $2.86 by trading the following legs:

Buy the December 160 put
Sell the December 170 put
Sell the December 210 call
Buy the December 220 call

Maximum profit of the net credit collected is valid at expiration if NFLX is trading between the two short options (higher than the 170 put and lower than the 210 call). The condor will be in profitable territory if NFLX is trading between the breakeven prices of $167.14 and $212.86 at expiration. Breakevens are calculated as the short put less the credit collected and the short call plus this credit.

Current volatility, as reflected by the at-the-money straddle as described in the bullish strategy above, indicates NFLX should be able to stay between the breakevens through expiration. Volatility is a very fluid variable, however, and could change at any time between now and expiration.

An iron condor can only lose on one side of the trade and losses are capped at $7.14, or the spread between put (or call) strikes minus the initial credit. Losses peak below the 160 strike and above the 220 strike.

Profit and loss of Netflix (NFLX) iron condor