Netflix has been in the news a lot lately. After a disappointing 2011, the stock got off to a good start this year, only to run into trouble again during the summer months. The stock had been in a sideways pattern, but the stock got a nice bounce last week on news that activist-investor Carl Icahn has picked up close to a 10 percent stake in the company.
In reaction to this, Netflix on Monday put in place a poison pill that would prevent Icahn for taking on a bigger, more controlling position in the company. Icahn insists that he has no intention of taking a controlling stake in the company and that he just picked up his stake because he believes the stock is undervalued based on its market position.
With so much attention being paid to the stock, we are going to look at a couple ways you can play the stock, depending on your opinion about the company’s future.
1. Long the Stock
risk level = moderate
For investors that believe Icahn is onto something and want to get into the stock, the easiest way is to just buy shares. Buying NFLX is bullish, and with the stock’s big move to the upside last week, you need to really be confident in the company’s future. The stock is up 8.6% so far this year, but the majority of its gains came last week. It was about break even for the year on October 26, and then jumped nearly 14% following the news of Icahn’s investment. The stock has since settled down a bit, but still remains well above where it was just a week ago. With such a strong move coming last week, we would probably want to give it a little time before jumping into a long position. We would like to see shares fall to around $75 before setting up any new positions.
2. Bull-Put Credit Spread
risk level = low
A bull-put credit spread may be the best way to approach the stock from a bullish point of view. It allows you to get into the action, but at the same time gives you some downside protection in the event that we see more selling into its current strength. You could set up a January 57.50/52.50 credit spread for a credit of 65 cents. In this trade you will be selling January 57.50 puts while buying the same number of January 52.50 puts. This trade would give you a target return of 14.9%, and offers you 26% downside protection in case the stock trades lower.
3. Buy Calls on the Stock
risk level = high
This trade is for very bullish investors. This is an approach that we would probably avoid at this time, solely because of how much the stock has already risen in the last week, but if you think Icahn is right, and the stock is going to continue to improve, then this could be the trade for you. The good news, is that the stock has traded down a bit from its high of $84.95, so it is possible that we are seeing a little profit taking now and once that is done the stock will move back towards the $85 level. You can take a look at the January 82.50 calls, which are currently trading at $5.85 per share. In order for the stock to cross the $82.50 mark, it will need to trade up just 5.5%, and it since it was higher than that last week, there is a chance we could see it hit that level over the next couple of months. Of course, even if it does not trade all the way up to $82.50, your options should still go up in value if we see some up days in the next few weeks.
4. Buy Puts on the Stock
risk level = high
Given how the stock has traded over the course of the year, this may be a better option than buying calls. Buying puts means that you think last week’s move was overdone, and that we are going to see more profit taking ahead. While Icahn’s move into the company is encouraging, it really does not change anything. If you believe the stock was fairly priced last week, then it should trade lower in the weeks ahead and get back to where it traded at the start of last week. You could look at the December 75 puts, which are currently trading at $5.00 a share.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va. His articles typically cover big-picture events and forecasting what impact they will have on the stock market. In addition to writing for Fresh Brewed Media, Michael also wrote for AOL's BloggingStocks for three years, focusing most of his attention on the energy and technology sectors.