Netflix just crossed back above the 50-day moving average in a nice bullish move.
According to the IBD Stock Checkup, Netflix stock is ranked No. 1 in its industry group and has a Composite Rating of 95, an EPS Rating of 85 and a Relative Strength Rating of 95.
Today, we're looking at a bull put spread. As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if Netflix trades sideways or higher and even sometimes if it trades slightly lower.
With NFLX stock trading around 434, if we use the October expiration, we can sell a 375 put and buy a 370 put for around $0.75.
Selling this spread would generate roughly $75 in premium with a maximum risk of $425.
Max Return Exceeds 17%
If the spread expires worthless, that would be a 17.65% return in seven weeks. That's provided Netflix stock is above 375 at expiration.
The maximum loss would occur if Netflix closes below 370 on Oct. 20, which would see the premium seller lose $425 on the trade.
The break-even point for the trade is 374.25. That's calculated as 375 less the $0.75 option premium per contract.
I would set a stop loss if Netflix stock drops below 400. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be $75.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
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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
