Netflix was yesterday's IBD Stock of the Day and a recent addition to SwingTrader. For a mildly bullish position in Netflix stock, a bull call spread gets you exposure with less capital at risk.
Netflix Stock Sets Up
Netflix stock is nearing a buy point of 349.90 out of a cup-with-handle base, according to IBD MarketSmith charts. The recent move above its 21- and 50-day moving average lines provided an early entry for its addition on SwingTrader.
Netflix stock is also showing an annualized 5-year EPS growth rate of 49%.
According to the IBD Stock Checkup, Netflix stock is ranked No. 2 in its industry group, and has a Composite Rating of 90, an EPS Rating of 68 and a Relative Strength Rating of 94.
Options Trading Turns 50: What To Expect Next
Implied volatility is at the lower end of the 12-month range for NFLX stock. That means we generally look to buy premium in our option trades. In other words, debit spreads rather than credit spreads.
Setting Up The Bull Call Spread
A bull call spread is a bullish debit spread that is created through buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the July expiration, a 340-strike call option traded around $21.20 yesterday. The 350 call with the same expiration was around $16.90.
Buying the 340 call and selling the 350 call combines to create a bull call spread.
The trade cost would be $430 (difference in the option prices multiplied by 100). That is also the most you can lose on the trade.
The maximum potential profit is $570 (difference in strike prices, multiplied by 100 less the premium paid).
Managing The Trade
A bull call spread is a risk defined strategy, so if NFLX stock closes below 340 on July 21, the most the trade could lose is the roughly $430 premium paid.
Potential gains are also capped above 350, so no matter how high Netflix stock might go, the most the trade could profit is $570.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 344.30.
In terms of trade management, if the stock dropped below the May 2 low of 315.62, I would consider closing early for a loss.
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Netflix stock is due to report earnings in late-May, so this trade would have earnings risk if held until then.
This ratio spread trade on Boeing worked well for those that took part.
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.
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
