Netflix, Inc. (NASDAQ: NFLX) shares are trading higher this morning after the company announced it expects 1st-quarter net income between 15 and 22 cents per share, up from a previously predicted profit of 13 to 21 cents per share. The change came after NFLX boosted its anticipated subscriber growth for the quarter to 8.16 to 8.26 million, up from 7.85 to 8.05 million. NFLX also upped its fiscal-2008 earnings estimate to $324 to $328 million, up from a range of $323 to $328 million. 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 low of $15.62 in July, the stock has hit a new one-year high today. NFLX opened this morning at $30.50 and has so far today hit a low of $30.00 and a high of $31.60. As of 10:35, NFLX is trading at $31.31, up $2.30 (7.9%). The chart for NFLX looks bullish and steady.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $20 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. For this particular trade, we will make a 4.2% return in just four months as long as NFLX is above $20 at June expiration. Netflix would have to fall by more than 36% before we would start to lose money.
NFLX hasn't been below $20 since September and has shown support around $26 recently. This trade could be risky if Amazon (NASDAQ: AMZN) or Apple (NASDAQ: AAPL) becomes a serious competitor to the online and direct mail movie business, but even if that happens, this position could be protected by the support the stock might find at its 200-day moving average, which is around $22 and rising.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in NFLX, AMZN, or AAPL.
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