NFLX: A Play for Rangebound Trading

 | Dec 19, 2011 | 12:00 PM EST  | Comments
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This commentary originally appeared Dec. 19 at 10:26 a.m. EST on Options Profits – the options trader's source for daily trading strategies and actionable trade ideas. Click here to learn more.

Netflix (NFLX) has been in a tight range for a couple months now. After having been kicked in the teeth a few times this year, it seems to have found a level. One of the strengths of options is that traders can profit from stocks that they don't expect to move much.

Today, I took the following position in NFLX:

Trades: Sell to open NFLX January 55 puts at $1.50 and buy to open NFLX January 50 puts for $0.81.

This type of trade is referred to as a put credit spread. The spread makes money as long as NFLX is above $54.31 at expiration, 33 days from now. If NFLX falls below that break-even price the trade is a loser.

There is a lot of room for error on this trade. $54.31 is 20% below the current $67.95 price of NFLX. This trade does have some risk, with NFLX having been so wily this year, but it is a high-probability trade with a good risk-reward.

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