First, in August, came the news that Disney was pulling all of its content from Netflix, Inc. (NFLX) in order to start its own streaming business. This created a frenzy in the mainstream media, with the pundits arguing between themselves about whether or not the streaming goliath could even survive.
Then, in October, the stock fell 1% after the indefinite suspension of one of its star shows, House of Cards, following multiple serious Kevin Spacey allegations.
And now, we know that Ann Mather, who serves on Netflix’s Board of Directors, sold 3,885 shares of the stock for $777,000.00 back on November 7.
All of these developments have got investors and traders nervous about putting any money down – and understandably so.
The good news is… you can actually profit no matter if NFLX skyrockets or plummets from here.
All you need is this trade setup…
Two Strategies to Cash in on NFLX – Whether it Goes Up, Down, or Doesn’t Move at All
Before we get to your best profit opportunities, let’s talk a little more about the two leading reasons many of the pundits have gone decidedly bearish on Netflix, Inc. (NFLX):
- Hollywood
The multitude of stories surrounding prominent figures in Hollywood hasn’t boded well for the entertainment industry. It’s carried over into online streaming arena and the companies providing that content as well, especially when it comes to Netflix, Inc. (NFLX).
The pulling of its company’s flagship program is a noteworthy concern, but it’s not the end of the road for them. NFLX is building its brand, establishing its reach, and producing even more digital and streaming content, to which TV is playing catchup. So it has a strong chance of weathering this storm going forward.
- The Walt Disney Company (DIS)
According to Disney’s company chairman and CEO, Bob Iger, their new streaming service (launching in 2019) will be “substantially below” Netflix’s monthly subscription.
Keep in mind that NFLX didn’t drop a precipitous amount on the initial news that Disney was pulling its content. And during recent earnings, their CEO, Reed Hastings, said the loss of this content wouldn’t have that adverse an effect because their expansion into the international markets is going so well. He also pointed out that Disney’s content was only available in a few countries anyway. In fact, Netflix added 5.3 million new subscribers in the fiscal third quarter, with 4.4 million of those new subscribers making up the international market (850,000 added were in the U.S.).
And while House of Cards may have been their flagship program, NFLX has been busy building more original content, such as the hit shows Stranger Things and Narcos.
Now I’m not going to presume to know what will happen from here, but I can give you the best trading strategy to consider – whether NFLX goes up or down next…
In the chart above, you can see an established support for NFLX at $190, which was its previous resistance peak back in July. As you can see, the stock just recently bounced off a re-test of that price. It’s also seeing declining tops in what is possibly going to result in a technical triangle pattern forming. From here, NFLX will either bounce higher and take out this declining resistance level or resolve itself to the downside. This could take out the $190 support, which could see a further move to a recent pivot low at $175-$177.
Ultimately, though, the stock could move in either direction.
So here’s what to do…
If you see NFLX going higher over the next month or two, consider what I call a bullish “Loophole Trade (also called a call debit spread).” As you’ll recall from last week, this is a slightly bullish strategy where you anticipate the stock moving higher in the near term.
Here’s an example…
For maximum profitability to be realized, NFLX has to be above the strike price of the option you sold-to-open at expiration. The most a $5 spread can make is $5 per contract (one contract = 100 shares, which makes $500 per contract in this case).
With the stock trading over $200 at expiration, you can anticipate the markets exercising the right to buy the stock for $200, which should result in your account exercising the right to buy the stock for $195 – making that $5 (or $500) per contract LESS the cost or debit of the trade to begin with.
This means that you can deduct the up-front debit of $2.43 ($243) from that $500 if NFLX is over $200 at expiration. That leaves you with a profit of $2.57 (or $257) per contract – a 105% rate of return in only 60 days.
| Editor’s Note: The last time Tom recommended NFLX to a small group of his readers, they had the chance to score 101.47% in just ten days. Now, Tom has 8 new trade recommendations lined up that he expects to return 998% total gains in just a matter of days. Click here to learn how to get the lucrative details. |
Now if you see NFLX going lower or staying in a sideways trading trend (maintaining its current price for a spell), consider a bearish “Loophole Trade (call credit spread).”
This is a strategy you can use if the stock doesn’t do anything at all. Depending on how you set up the strike prices of the options you’re trading, you make some cash if the stock stays where it is by the time they expire.
Here’s what I mean…
In order for this spread to realize the maximum profit, NFLX only has to be trading under the strike price of the option you sold-to-open at expiration. That means NFLX needs to stay under $200. It can do whatever it wants UNDER that price so long as it just stays under $200 at the time the options expire so your realizes the credit. After all, if the stock is trading under $200, who would want to buy it at a higher price through this trade when they can simply buy it on the open market for much less?
That’s why this trade idea works if you’re anticipating a drop in the stock from here.
It’s more than likely that no one is going to want to buy the stock from you at a higher price, which means that option expires. The other option then wouldn’t have to be exercised since no one is buying that stock from you, so it expires – and you get to keep the cash you generated when you opened the trade.
In the end, you get to keep the $205 credit. If both options get exercised, the account loses $295. Keep in mind, the most the spread can make is $500 per contract. So if both options get exercised, it would be like the account buying the stock for $205 and selling it at $200 or a $5 per contract ($500) loss offset by the $205 credit.
That means the maximum risk on this trade is $295, and your profit on that is $205 – giving you 69% rate of return (ROI). It might be a smaller ROI but it’s got a higher probability of staying under that strike price of that option you sold-to-open at expiration.
Not bad, right?
To your continued success,
Tom Gentile
