Netflix has bounced off the 50-day moving average in the last few days. Plus, Netflix stock is showing strong relative strength vs. the S&P 500 over the past five months.
IBD Stock Checkup ranks Netflix stock as No. 1 in its group. The stock also hosts a Composite Rating of 91, an EPS Rating of 89 and a Relative Strength Rating of 85.
So, the idea we are looking at today is a bull put spread trade in options. As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance.
Netflix Stock Today: How To Set Up This Spread Trade
This type of trade will profit if NFLX trades sideways or higher and even sometimes if it trades slightly lower.
With Netflix stock recently trading around 294, if we use the Jan. 20 expiration, we could sell a monthly put option with a 260 strike price. Then, we buy a 255 put. Based on recent trading, selling this spread in Netflix stock would generate roughly $115 in premium. Also, this spread trade would carry a maximum risk of $385.
If the spread expires worthless, that would generate a nearly 30% return in one month, provided Netflix stock trades above 260 at expiration.
Risk Vs. Reward
The maximum loss would occur if Netflix stock closes below 255 on Jan. 20. If this occurs, the premium seller loses $385 on the trade.
The break-even point for the trade is 258.85 for the stock price. Calculate this by taking 260 less the $1.15 per share option premium per 100-share contract.
I would set a stop loss if NFLX drops below 270. Otherwise, another good rule of thumb: limit the loss to the amount of premium received — in this case that would be $115.
Sticking to this stop-loss level will help avoid large losses if the trade in Netflix stock goes south.
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
