Netflix is one of the strongest stocks in the market at the moment and bull put spreads like this one have worked well for investors seeking defined-risk options strategies. With the streaming giant continuing to show resilience, let's examine another potential opportunity.
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 stock trades sideways or higher and even sometimes if it trades slightly lower, offering flexibility in uncertain markets.
The strategy involves simultaneously selling a higher strike put option while buying a lower strike put option in the same expiration cycle.
Meanwhile, in exchange for selling the bull put spread, the trader receives the option premium and has risk equal to the difference in strike prices, less the premium received.
Trade Setup For Netflix Stock
Traders that think Netflix will stay above 985 for the next few weeks could sell a June 20 put at 985 and buy a 980 put. That creates a bull put spread that brings in a premium of around $1 this morning. Selling this spread would generate roughly $100 in premium with a maximum risk of $400. If the spread expires worthless that would be a 25% return in under two months. That assumes, however, Netflix stock stays above 985 at expiration.
The maximum loss would occur if Netflix stock closes below 980 on June 20. Further, that would see the premium seller lose $400 on the trade. The breakeven point for the trade is 984, which is calculated as 985 less the $1 option premium per contract. That's 12.6% below the 1,126 price it traded at this morning. A lot of room for this trade to work.
I would set a stop loss if the stock breaks back below 1,050. Another stop loss to use would be an increase in the spread value from $1 to $2. Sticking to this stop-loss level will help avoid large losses if the trade goes south.
Ranked Tops In Its Group
According to Investor's Business Daily's IBD Stock Checkup, Netflix stock ranks No. 1 in its group. It also has an ideal Composite Rating of 99, an Earnings Per Share Rating of 98 and a Relative Strength Rating of 97.
For investors seeking income generation with defined risk parameters, this Netflix bull put spread presents an appealing opportunity in the current market environment.
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, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
