NetFlix NFLX

First off, I want to state that I am not a financial adviser. I am simply an individual trading my own private accounts and sharing my ideas. I encourage any feedback as I enjoy a good intellectual conversation.

That said, I am thinking that I like Netflix for fundamental reasons. With the economy on the ropes, people are looking to cut back on expenses yet they still want their nightly relaxation and entertainment. Netflix offers an excellent selection of CD's at a very affordable rate. Combined that with their newly revamped SilverStream movie delivery system over the internet and in my opinion you have a company positioned to do very well in this economy. According to the NY Times, Netflix surpassed ten million customers last February.

Netflix should be reporting quarterly earning in the next 28 days. So how can I profit from this and what if I am wrong. If I buy the stock I take on a risk of loss from the moment that I buy it. And if the projected earning are already priced in,(you know; buy the sizzle, sell the steak) then the stock will go down and I will loose money. And given that NFLX is already close to the 52 week high of $44.42 what is my potential upside?

To summarize, Now that NFLX has pulled back to the 20 day moving average and is still in a bullish stage, I think NTFX will rise to the low 40's again within the next 4 weeks. Once again,I could be wrong. So here is my play: I am going to SELL the NFLX MAY 40 Puts. I will make $420 for each contract that I sell (1 contract is 100 shares), But I will be obligated to purchase NFLX stock at the price of $40.00/share between now and the 3rd Friday of May.) This actually gives me some downside protection. At the current price of 39.68 I will have downside protection of $3.88 (almost 10% downside protection) This means that I will break even if I am forced to by the stock at 40 but it is trading at 35.80. Anything above that and I am still making a profit. Anything below that and I take a loss. From a purely statistical approach, there is a 38.58% chance that NTFX will fall below my break even during that time. My bet is that once you consider the fundamentals of this company, I am thinking that number should fall to the 25% area.

What if I am wrong? Well that is not so bad, I get NFLX stock on the cheap. (not as cheap as if I had waited and bought it in mid May, but still cheaper than today.) and since they are a profitable company, I will simpley become an Investor for a while and wait for the stock to move back up to a profitable position for me.

Finally, What if I am really really wrong. What if Bernie Madoff rented 2 million CD's and he doesn't plan to give them back. If NetFlix was to fall to zero, I would lose $3,580.00 for each contract I sold. So I am going to buy May, 30 Puts. That way if disaster hits NFLX, I would only loose $695.00 per contract. Of course I wouldn't make as much money ($420.00 - $115.00) I would make $305.00 per a contract just as long as NFLX closes above 40.00 on May 15th. 2009

One last thing to keep in mind, these are American options and I could close my positions at any time by purchasing back what I sold and selling what I bought. I frequently do this when I have hit 75% of my profit target.