A 'Flix' for your portfolio
Inflation is here as predicted and unlike our government, responsible people are seeking ways to enjoy their lives, while also living within their means. That said, why would a family of four spend over $100 on an evening at a movie theater, when they can spend less than 10% of that and still be happy?
For a very low monthly fee (less than the fuel cost to drive to the theater) you can borrow some of the newest films, without even having to leave home.
Since peaking just shy of $250 in mid-February, Netflix shares have been trading sideways with a series of higher lows, along with two peaks near the same level. While dual peaks near the same price typically indicates a double top, we don't see that as a possibility at this juncture. Why? NFLX had an opportunity to break to the downside on April 12th, but rather than doing so, rebounded off the 50-day moving average on increased trading volume and is now bumping its head against an all-time high.
Revenues are projected to soar 45% in fiscal 2011 (year-ending December 2011) and 30.3% in 2012. Meanwhile, earnings are slated to jump from $2.96 in 2010 to $4.40 in 2011 and $6.37 in 2012, more than doubling over two years. The company touts a trailing 12-month price/earnings multiple of 83, versus 82 for its peer group. Even better, the company trades at 1.75 times its projected 5 year earnings growth rate, while its average competitor is more than twice as expensive.
To trade this opportunity we recommend buying a June 225/230 call spread for $3.20 per option, or $320 per contract, which breaks down to purchasing the June 225 call for $30.10 and selling short the June 230 call for $26.90. As long as the shares remain above $230, you will see your position appreciate as the option expiration date (June 17th) approaches. Your maximum possible gain would be $180 per option contract, or a 56% return before commission.
If you're really brave, you could reduce your entry cost to $0.25 per option, or $25 per contract (before commission) by financing the above trade with a put option credit spread. For example, you could sell the June 225 put for $10.65, while purchasing the June 215 put for $7.70. Doing this would reduce your entry cost of the call spread trade to $25 per contract and boost your potential gain from 56% to a very impressive 620%.
The downside to shorting a spread
is that your broker will likely impose margin requirements on your
account until the short spread position is closed. But it is well
worth the inconvenience of leaving cash stagnating in your
account if the bet pays off.