Has Netflix (NFLX) Found A Bottom?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.  The actual portfolio that Terry’s Tips carries out with these plays we send to you each week has gained 98.5% so far this year.  We started out 2018 with $5000 in the portfolio and withdrew that amount in June so that subscribers who mirrored it in their own account or had trades executed for them with the free Auto-Trade service at thinkorswim have almost $5000 left and it is entirely profits for them.

Terry

Has Netflix (NFLX) Found A Bottom?

Despite a recent correction, market sentiment towards Netflix stock remains positive while certain analysts see a notable upside from current levels.  Take a look at this recent article posted on Investopedia that states a 30% rally could be in the cards for NFLX and the following article posted on Seeking Alpha that builds a strong case for remaining bullish.

There are several technical developments over the last month or so that suggest Netflix has turned bullish once again.  The stock price is seen climbing above horizontal resistance at $356 and holding above the 20-day moving average.  Aside from that, a recent convergence with the S&P 500 might be sending the strongest signal of all.  Note that NFLX diverged from the index for about a month starting from mid-July to correct lower.  Since around the middle of August, the stock price has once regained its correlation with the popular index, which is often a tell that an important bottom might be in place.  The S&P 500 is added to the chart below and denoted in bars to illustrate the divergence and subsequent convergence.

NFLX Chart September 2018

*source Tradingview.com

If you agree there’s further upside ahead for NFLX, consider this trade which is a bet that the stock will continue to advance over the next four weeks, at least a little bit.

Buy To Open NFLX 12OCT18 362.5 Puts (NFLX181012P362.5)
Sell To Open NFLX 12OCT18 365 Puts (NFLX181012P365) for a credit of $1.18 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when NFLX was trading near $365.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $115.50 and your broker would charge a $250 maintenance fee, making your investment $134.50 ($250 – $115.50).  If NFLX closes at any price above $365 on October 12, both options would expire worthless, and your return on the spread would be 86% (1256% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates September 13, 2018

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry