What happened after Netflix, Inc. (NASDAQ:NFLX) released its Earnings Report for the third quarter was nothing less than a catastrophe for the online steaming platform’s stock price. Investors would be wise to learn from those mistakes and hedge their bets this time around, no matter how bullish they are in the long run.
On Bloomberg, MKM Holdings Derivatives Strategist, Jim Strugger explained the long term outlook that he has on Netflix, Inc. (NASDAQ:NFLX), and also the short term measures that he is taking to protect his investment when the company reports its earnings for the fourth quarter next week.
“Yeah, long term we are very bullish. We have got almost a high end of the street price target of $530, so very constructive in the longer term, but this quarter is going to be about subscriber growth. They missed in the third quarter, that is going to be the focus […],” explained Strugger.
As far as Strugger’s hedging strategy is concerned it revolves around a put call spread, partly financed by selling a call option on the Netflix, Inc. (NASDAQ:NFLX) stock with a strike of $400. Both the Put Call spread and the Call option expire in February.
“[…] In February we want to sell an upside $400 strike call. We want to turn around and buy a put spread specifically at $320, $270 Put Spread. You put that on for just about 3.5% of the underlying, sounds like a lot, but what we are trying to do here is really manage significant downside in this stock that declined almost 20% after reporting third quarter earnings […],” said Strugger.
As a result of this trade, the loss is unlimited and depends on how much the price of the Netflix, Inc. (NASDAQ:NFLX) stock rises. However, in the case of a falling price, the investor will reap significant rewards from this options strategy.
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