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1:00pm (EST)
We haven’t mentioned Netflix (NFLX, $74.84, up $0.94) in a while, but it is stock we watch every day. In fact, we wanted to talk about it today for a reason and to give those of you who aren’t subscribers a look inside our exclusive Members Area.
Sometimes in option trading when the market is flat or hard to read it’s easier to look for trades six months to a year out which are often referred to as LEAPs.
In November 2009, we profiled a Netflix call option trade and here were our initial thoughts (quotes are from 11/13/09):
“Netflix (NFLX, $58.19, down $1.25) is a company we are watching now because it has the look and feel of a stock that wants to go to $100. Right now it’s at 52-week highs and we are waiting for a break above $60. Nice round number huh? Well, the exact 52-week high is $59.89 and a break above $60 could lead to more momentum.
For high risk traders, you could play the November calls for a day trade or longer but realize these options expire next Friday. The safer play would be to look at the December calls. If Netflix does break $60 then we may send out an alert based on market conditions.
One interesting thing and here is where our new trade comes into play.
If Netflix could manage to make a run to $100 by June 2010 then we will do very well with this trade. The big reason we think the stock could go to $100 by next summer is due the serious sense it makes for someone to buy them.
Microsoft (MSFT, $29.36, up $24) already has a partnership with Netflix and would be the most logical choice. Combining the xBox with Netflix’s Roku box seems like a match made in internet heaven.
You want to know why Blockbuster (BBI, $0.83, up $0.02) is closing shops faster than a beach bar going into winter. If you have a Netflix mailing plan you can get unlimited streaming of 50,000 movie and TV shows by getting this Roku box. Just go to your computer, find the movie/show you want and enjoy it as soon as you get to the couch.
Come to think of it, Apple (AAPL, $201.99, down $1.26) would make a good fit too. Either way, even without a buyout offer, Netflix could have the muscle to make it to $100 in 8 months on its own. We would love to see the stock come back down to $55-$56 which is where short-term support lies but we will also be watching for the break above $60.” (END)
Here were out thoughts two weeks later after we were stopped out on the Dubai news. We had a tight stop on this trade and here were our comments outside the Members Area before the open (quotes are from 11/27/09):
“After pushing the major averages to new highs for the year, the bulls will be in trouble today as the bears looked poised for a HUGE market correction today. We were up late checking the futures market and shortly after midnight the Dow futures we down a whopping 247 points to 10,195. The S&P 500 futures are off by 32 to 1,076 while the Nasdaq 100 futures are lower by 54 points to 1,740.
There is news out of Dubai that shook the Asia markets and there was a heavy sell-off as investors worried about banks’ exposure to Dubai World’s debt. Dubai World is the city state’s largest corporate entity and has asked creditors for as six-month stay on debt repayments of nearly $60 billion.”
Inside our Members Area that day:
2010 June 80 calls (QNQFP, $1.40, down $0.25)
Entry Price: $1.65 (11/13/09)
Exit Target: Closed at $1.25 on (11/27/09)
Action: Netflix got hammered at the open and traded to a low of $54.71 shortly after. Needless to say we were stopped out on both trades.
We did pretty well today by cutting our losses and taking the emotion out of our trades. Yes, some of the positions bounced back but we feel a lot better going into the weekend with a clean slate for next week.
It is rare a risk event this big hits the market but they do happen. As an option trader, it doesn’t matter how much you like a certain trade…just take your lumps and regroup. We target 100% returns on our trades which gives us the luxury of having two 50% losing trades for every winner. Our success rate is much better than that of course as we have been able to hit on 8 out 10 trades on average for 2009.
However, there are times when the market will whipsaw us out of some great trades and you just have to go back to the drawing board and figure out what it all means. That is what we will be doing this weekend and we will be back with an update on Sunday night.” (END)
The point we want to make is that the Netflix June 80 calls (QNQ100619C00080000, $3.50, up $0.47) have now doubled which showed our research was spot on. Although we had a “tight stop” on this trade sometimes it pays not to have one and go with your instincts.
This trade ended up getting ridiculously cheap as Netflix dropped to a low of $48 by mid-January. However, the stock jumped 13 points when Netflix announced earnings and closed above $60. The company is also working on becoming a global force in the near future which really got Wall Street excited.
It’s important to keep these things in mind when looking for new trades or waiting for stocks to breakout but we should have revisited the story once shares broke through our $60 resistance level.
As far as the market, the bulls are struggling to hold the morning gains as the Dow is up 5 points to 11,900. The S&P 500 is flat at 1,172 while the Nasdaq is higher by 2 points to 2,405.
We are profiling another NEW TRADE in today’s write-up so let’s get to the Members Area…
Tags: Netflix, NFLX, option picks, option signals, options alerts, stock option picks, stock options trading
