Netflix is back above the 50-day moving average and is showing an improvement in relative strength. Therefore, today's trade in Netflix stock has an exotic nickname: the jade lizard.
By using a combination of option strategies, we could potentially buy the stock for a significant discount or achieve a healthy profit if the stock trades sideways.
Netflix Stock Today: The Set-up
Currently, Netflix stock shows a 91 Relative Strength Rating on a scale of 1 to 99.
This means shares have outperformed 91% of all companies in the IBD database over the past 12 months. And the six-month RS Rating of 86 is not shabby, either, according to the Technical panel on a NFLX chart in MarketSurge.
Here's the trade:
Sell to open the NFLX June 21-expiring put option with a strike price of 570, which recently traded around $6.60 per share.
Then, add a bear call spread in this fashion:
- Sell to open the NFLX June 21 call with a strike price of 670, which traded around $4.90.
- Buy to open the NFLX June 21 call with a strike price of 675, which traded around $4.15.
The sold put option brings in around $660 in option premium for a 100-share block. Plus, the bear call spread in Netflix stock adds another $75 in premium per set of contracts. In total, the combination of the two trades generates $735 in premium.
The position starts with a delta of 17, meaning it is roughly equivalent to owing 17 shares of NFLX.
This figure will change as the trade progresses.
Possible Scenarios
Let's work through a few scenarios of how this trade in options on Netflix stock could look at expiration on June 21.
- If Netflix stock trades sideways and finishes between 570 and 670, the sold put and bear call spread will both expire worthless. The total profit equals the premium received of $735.
- If NFLX falls below 570 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at 570. However, our net cost basis will be 562.65, thanks to the $735 in option premium received. That is 7.9% below Friday's closing price.
- If shares rally above 675, the bear call spread will suffer a full loss of $500, but this will be fully offset by the $735 premium received, leaving the trade with a gain of $235 per set of contracts.
Netflix Stock: Group Leadership
According to IBD Stock Checkup, NFLX stock ranks No. 1 in its group and has a Composite Rating of 98, an EPS Rating of 99 and a Relative Strength Rating of 91.
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
