A calendar spread involves selling a short-term option and buying a longer-term option with the same strike price. Can this income trade be done in a megacap growth stock such as Netflix? Amid ongoing leadership by the Nasdaq and large-cap issues, let's consider a calendar spread trade in NFLX stock.
Usually, this is done with monthly options, but it can also be done with weekly options.
Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
NFLX Stock Today: Setting Up The Spread
With NFLX stock trading near 400, setting up a calendar spread at 405 gives the trade a neutral outlook overall. Selling the June 16-expiring call option with a strike price of 405 will generate around $1,025 in premium, and buying the July 21, 405 call will cost roughly $2,490.
That results in a net cost for the trade in NFLX stock of $1,465 per spread. And that is the most the trade can lose.
The estimated maximum profit comes out to $770. Of course, that net gain could vary depending on changes in implied volatility.
The idea with the trade? If Netflix remains around 405 for the next few days, the sold option will decay faster than the bought option — allowing the trade to be closed for a profit.
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Break-Even Levels
The break-even prices for the trade in NFLX stock are estimated at around 389 and 425, but these can also change slightly depending on changes in implied volatility.
For this reason, calendar spreads are considered a more advanced strategy and not recommended for beginners.
For a trade like this, I would set a profit target of 30%. Plus, I would set a stop loss if NFLX stock breaks through either 389 or 425.
Calendar spreads are a neutral option trading strategy. Bullish traders might consider something simpler like a bull call spread, similar to this trade in Palo Alto Networks.
NFLX stock is a leader in the movie industry group and has a Composite Rating of 93, an EPS Rating of 69 and a Relative Strength Rating of 97.
Please remember that options are risky, and investors can lose 100% of their investment.
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 Twitter at @OptiontradinIQ
