Netflix (NASDAQ: NFLX - option chain) stock is trading lower today on reports that Google (NASDAQ: GOOG) subsidiary YouTube is in talks with Lions Gate Entertainment (NYSE: LGF), Sony's (NYSE: SNE) Sony Pictures, and Time Warner's (NYSE: TWX) Warner Brothers about online movie rentals via the YouTube platform.
If the plan goes through, it could present a significant challenge to NFLX, which has a stranglehold on the streaming movie business right now. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on NFLX.
This morning, NFLX opened at $41.31. So far today the stock has hit a low of $39.27 and a high of $41.50. As of 12:00, NFLX is trading at $40.15, down $1.63 (-3.9%). The chart for NFLX looks bullish.
For a bearish hedged play on this stock, I would consider a December bear-call credit spread above the $52.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call 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 an 8.7% return in three and a half months as long as NFLX is below $52.50 at December expiration. Netflix would have to rise by more than 30% before we would start to lose money. Learn more about this type of trade here.
NFLX hasn't been above $52.50 at all in the past year and shown resistance around $46 recently.
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, GOOG, TWX, SNE, or LGF.