Netflix Options Play: Unlocking Bigger Gains with Less Risk

Netflix (NFLX) stock is trading in between the 50 and 200-day moving averages and is rated a 56% Buy with a Weakening short term outlook on maintaining the current direction.

In the fourth quarter of 2024, Netflix reported a 16% year-over-year revenue increase, reaching $10.25 billion, surpassing expectations. Net income for the quarter stood at $1.87 billion, translating to earnings of $4.27 per share.

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The company added 18.9 million subscribers during the quarter, bringing its global total to 301.6 million. In the United States and Canada, paid memberships grew to 89.6 million, up from 84.8 million in the previous quarter.

Netflix's ad-supported tier experienced significant growth, with around 55% of new Q4 subscriptions coming from these plans. ​

The company's strategy to stream live events, including a high-profile boxing match and NFL games, contributed to the subscriber surge. Additionally, Netflix is investing in its gaming division to diversify content offerings and enhance user engagement.​

Looking ahead, Netflix plans to implement subscription price increases in several regions, including the US, Canada, Portugal, and Argentina, to fund new content and maintain its competitive edge.

Calendar spreads are an option trade that involves selling a short-term option and buying a longer-term option with the same strike.

Traders can use calls or puts and they can be set up to be neutral, bullish or bearish with neutral being the most common.

When doing bullish calendar spreads, we typically use calls to minimize the assignment risk. Likewise, if the calendar is set up with a bearish bias, we use puts.

Neutral calendars can use calls or puts, but calls are more common.

Let’s look at an example using Netflix.

Netflix Calendar Spread Example

With Netflix stock trading around $920, setting up a calendar spread at $920 gives the trade a neutral outlook.

Selling the March 28 call option with a strike price of $920 will generate around $2,535 in premium, and buying the April 17, $920 call will cost approximately $3,615.

That results in a net cost for the trade of $1,080 per spread, and that is the most the trade can lose.

The estimated maximum profit is $1,580, but that could vary depending on changes in implied volatility. 

The idea with the trade is that if NFLX stock remains around $720 for the next eleven days, the sold option will decay faster than the bought option allowing the trade to be closed for a profit.

The breakeven prices for the trade are estimated at around $880 and $966, but these can also change slightly depending on changes in implied volatility.

In terms of trade management if NFLX broke through either $880 or $966, I would look to adjust or close the trade.

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.

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.

Mitigating Risk

Thankfully, calendar spreads are risk defined trades, so they have some build in risk management. Position sizing is crucial to ensure that minimal damage is done if the trade suffers a full loss.

One way to set a stop loss for a calendar spread is close the trade if the loss is 20-30% of the premium paid. 

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.