from the desk of Dr. Terry F Allen

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The Post-Earnings Dip in Netflix (NFLX) Offers a Buy Opportunity

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.

Several analysts have become increasingly bullish on Netflix after their most recent earnings report, here are two of them – 3 Reasons Why Netflix (NFLX) Is a Great Growth Stock and Netflix: A High-Growth Utility Despite Its High Valuation.

Technicals

Netflix is one of the few well-known companies that has broken to fresh record highs after the Coronavirus inspired drop in March. In the process of doing so, the stock has broken above an important price level at $385 that was a hurdle on three distinct attempts between late 2018 and March of this year. This technical breakout could lead to notable gains for the stock making the current pullback a buying opportunity. Buyers have already shown signs of stepping in at the 20-day moving average, further support comes at the breakout point of $385.

NFLX Chart May 2020 Record highs

NFLX Chart May 2020

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 five weeks, or at least not decline very much.

Buy To Open NFLX 12JUN20 410 Puts (NFLX200612P410)
Sell To Open NFLX 12JUN20 415 Puts (NFLX200612P415) for a credit of $2.40 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when NFLX was trading near $415.  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 $1.30 per spread.  Each contract would then yield $238.70 and your broker would charge a $500 maintenance fee, making your investment $261.30 ($500 – $238.70).  If NFLX closes at any price above $415 on June 12, both options would expire worthless, and your return on the spread would be 91% (1038% annualized).

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

IBD Underlying Updates May 2, 2020

IBD Underlying Updates May 2, 2020

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

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I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

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