Boost Your Trading Profits with this Netflix Option Trade

Netflix (NFLX) stock has experienced a fantastic rally in the last month and is rated a 100% Buy according to the Barchart Technical Opinion. The following trade will do well if the stock stays above $390 between now and July 21st.

The strategy is called a diagonal put spread and it’s an advanced strategy because it utilizes options over different expiration periods and different strike prices.

The strategy involves selling an out-of-the-money put for a near term expiry and then buying a put for around the same price using a later expiry.

The idea with the trade is that the stock might fall a little, but should stay above the short strike price.

Let’s look at an example using Netflix.

Netflix Diagonal Put Spread Example

The trade I’m looking at is selling a July 21 put with a strike price of $390 and buying an August 18 put with a strike price of $370.

As of yesterday’s close, the July 21st put could be sold for around $7.65 and the August 18th put could be bought for $7.20.

The trade would result in a net credit of $45. 

The risk on the trade is on the downside with a potential maximum loss of $1,955. This is calculated by taking the difference in the spread (20) multiplied by 100 and subtracting the premium received (45).

The maximum potential gain is around $1,060 which would occur if NFLX closes right at 390 on July 21.

The trade has a nice profit zone in between $375 and $490.

Aiming for a return of around 10-15% makes sense and I would set a similar stop loss.

The worst-case scenario is a sharp drop in NFLX stock early in the trade. For this reason, if the stock drops below 390 in the next few days, I would also consider closing the trade early to minimize losses.

The initial trade set up has a delta of 4 meaning the position is roughly equivalent to owning 4 shares of NFLX stock. Note that this delta number can change significantly as the stock starts to move.

Below is the payoff graph with the blue line representing the profit or loss at expiration and the purple line being the trade as of today.

This is how the trade could look in around three weeks’ time.

So, provided NFLX stock stays above 390 in the next three weeks, the trade should be ok. As the trade requires the stock to not drop too much, this would not be an appropriate strategy for bearish traders.

Netflix Company Details

Netflix is considered a pioneer in the streaming space. 

The company evolved from a small DVD-rental provider to a dominant streaming service provider, courtesy of its wide-ranging content portfolio and a fortified international footprint. 

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.

Netflix streams movies, television shows and documentaries across a wide variety of genres and languages. 

Subscribers, both domestic and international, can watch them on a host of internet-connected devices, including television sets, computers and mobile devices. 

In the Domestic DVD segment, Netflix delivers DVDs through the U.S. postal service from distribution centers located in major U.S. cities.

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.

On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.