Netflix (NFLX) should benefit from writers strike

Netflix, Inc. (NASDAQ: NFLX) shares have been rising steadily since mid-November, when it became clear that the writers' strike was not going to be resolved quickly and consumers began searching for alternatives to TV reruns. With an end to the strike seeming unlikely soon, NFLX and other DVD rental businesses could get an added boost to their revenues from frustrated TV viewers. Also boosting NFLX are rumors of chief rival Blockbuster (NYSE: BBI) raising prices. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on NFLX.

After hitting a one-year high of $27.73 last December, the stock hit a one-year low of $15.62 in July. NFLX opened this morning at $25.02. So far today the stock has hit a low of $24.66 and a high of $26.91. As of 11:05, XMSR is trading at $26.29, up $1.42 (5.5%). The chart for NFLX looks bullish but deteriorating.

For a bullish hedged play on this stock, I would consider a March bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 4.2% return in just 3 months as long as NFLX is above $17.50 at March expiration. Netflix would have to fall by more than 34% before we would start to lose money.

NFLX hasn't been below $17.50 since September and has shown support around $22 recently. This trade could be risky if the rent-by-mail DVD business slows due to increased availability of movies online, but even if that happens, this position could be protected by strong support the stock may find at its 200 day moving average, which is currently at $22.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in NFLX or BBI.