Time To Buy Some Netflix…And Chill

Members of the European Parliament will get to question Facebook (NASDAQ:FB) CEO Mark Zuckerberg today on everything from Cambridge Analytica and Europe’s new privacy rules to the social network’s role in elections and foreign investment. He’s also expected to apologize over not taking a “broad enough view of our responsibilities” and not doing “enough to prevent the tools we’ve built from being used for harm.”

The early trade markets are essentially unchanged.  I am still willing to consider strong indications of bullish momentum.


Strategy Discussion

If one were a straight stock trader, simply buying NFLX in the $332.00 area could prove to be prudent. You are anticipating a move to the upside. It’s also a conservative way to enter NFLX without the limitation of time associated with other strategies. In this scenario, it would also be good practice to place a sell-stop order in the $325.00 area to mitigate potential losses.

For more active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.

Because of the reasons given above, the purchase of a debit call spread may be one way to approach this situation.  The first thing you want to do is calculate your target strike.  In order to do this, you need three pieces of information:  current price, date of expiration and at the money implied volatility for that expiration.  For NFLX, this calculation targets the $345 – $346 strike.  You may want to consider buying the June 1st weekly expiration 340/345 call spread paying $1.20.  The maximum risk is what you paid for the spread and the maximum reward is the width of the spread less any premium paid.  Max risk = $1.20, max reward = $3.80 which yield a reward to risk ratio of 3.16:1.

Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.