Earnings Season Alert: Netflix Stock in Focus
With Netflix set to report earnings on Tuesday, the options market is bracing for a potential 8% move in either direction. As we analyze the market’s expectations, we can structure an option trade that aligns with a bullish outlook.
Understanding the Options Market’s Expectations
The at-the-money put and call options for the January 24 expiration provide insight into the market’s expectations. The combined premium of these options is approximately $71, indicating an expected range of around 8% by the end of the week.
A Bull Put Spread Strategy
To capitalize on this expected range, we can create a bull put spread with a breakeven price near the lower end of the expected range. By selling a January 24, 800 put and buying the 795 put, we can create a spread trading for around 95 cents. This trade offers a potential return of 23.5% on risk between now and the end of the week if Netflix stock remains above 800.
Risks and Considerations
However, it’s essential to acknowledge the risks involved. If Netflix stock closes below 795 on the expiration date, the trade loses the full $405. With short-term trades like this, there’s little room for adjustment, and the possibility of losing 100% is very real. As such, this strategy is only suitable for traders with a high-risk tolerance and a bullish outlook for Netflix stock.
Netflix’s Strong Fundamentals
According to the IBD Stock Checkup, Netflix ranks No. 1 in its industry group, boasting a Composite Rating of 98, an EPS Rating of 98, and a Relative Strength Rating of 91. These strong fundamentals support a bullish outlook for the stock.
A Word of Caution
It’s crucial to remember that options trading carries risks, and investors can lose 100% of their investment. This article is for educational purposes only and should not be considered a trade recommendation. Always do your own due diligence and consult your financial advisor before making any investment decisions.
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