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This Netflix Stock Option Trade Offers 25% Potential Return On Risk

Netflix (NFLX) pulled back and found support at the rising 21-day exponential moving average.




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Netflix stock is ranked No. 1 in its industry group, with a Composite Rating of 95, an EPS Rating of 99, and a Relative Strength Rating of 72. 

The stock is showing accumulation and an improving relative strength line. Traders who expect strength in NFLX stock to continue could look at a bull put spread option trade. 

To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put. 

Selling the Oct. 15-expiring put with a 570 strike price and buying the 565-strike put would create a bull put spread. 

Netflix Stock Option Can Give $100 In Premium

This spread was trading for around $1 on Friday. That means a trader selling this spread would receive $100 in option premium and would have a maximum risk of $400. 

That represents a 25% return on risk between now and Oct. 15 if Netflix stock remains above 570. If Netflix stock closes below 565 on the expiration date, the trade loses the full $400. 

The break-even point for the bull put spread is 569, which is calculated as 570 less the $1 option premium per contract. 

This bull put spread trade has a delta of 4, which means it is a similar exposure to owning 4 shares of Netflix stock, although this exposure will change over time as the stock price moves. 

In terms of a stop loss, if the spread increased in price from $1 to $2.50, I would consider closing early for a loss. 

No Immediate Earnings Risk

With earnings set for late October, this trade should have no earnings risk, but keep an eye out for the earnings announcement date. 

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 

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