Netflix is highly rated and experienced a strong breakout Tuesday.
Investors interested in taking some bullish exposure can do so with much lower risk by through a bull call spread.
A bull call spread is created through buying a call and then selling a further out-of-the-money call. Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the December expiration, a 730-strike call option traded around $46.75, and the 760 call was around $34.25.
Maximum Profit Of $1,750
Buying the 730 call and selling the 760 call would create a bull call spread. The trade cost would be $1,250 (the difference in the option prices multiplied by 100), and the maximum potential profit would be $1,750 (the difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy, so if Netflix closes below 730 on Dec. 20, the most the trade could lose is the roughly $1,250 premium paid.
Potential gains are also capped above 760. So no matter how high Netflix might go, the most the trade could profit is $1,750.
The break-even price for the trade is equal to the long call strike plus the premium. In this case, that equals $742.50.
Exit Strategy For Netflix Option Trade
In terms of trade management, if the stock dropped below 700. Or if the spread value dropped from $1,250 to $600, I would consider closing early for a loss.
According to the IBD Stock Checkup, Netflix is ranked No. 1 in its industry group. It has a Composite Rating of 98, an EPS Rating of 98 and a Relative Strength Rating of 91.
Netflix is due to report earnings in mid-October, so this trade would have earnings risk if held through then.
Netflix has been spending aggressively on building its original show portfolio. This is helping it sustain its leading position despite the launch of new services like Disney and Apple TV as well as the existing services like Amazon Prime Video.
A long call trade on AppLovin discussed Sept. 3 has performed beautifully and can be closed for a huge profit.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
