Playing the Expiry for September 10, 2010: Netflix (NFLX)

Netflix [NFLX:NSD], trading at $142.70, has seen its shares touch a 52-week high again, with a strong push of more than 15 per cent in the last four trading days. The chart below, courtesy BigCharts.com, shows that the shares are now above the Bollinger Bands, indicating the rally will probably cease and a probability in a price drop has increased. The only fundamental that could allow the shares to rise in the next few days would be a positive report from the Beige Book - to be released Wednesday Sept 8 at 2 PM EST.


With a higher potential for a negative trade in the next few days, we could implement two types of trade: A long put or a bear put spread.

A long put is a pure play on a negative move, but with time value on the weekly option representing almost half the option value, a move below $140.40 would be required to make a profit.

Instead, if we take a look at the 145 ($4.60) and 140 ($2.20) puts, we can create a debit spread of approximately $2.40 (this spread may change based on the underlying price of Netflix), thus requiring a drop below $142.60. If the stock drops below $140 on Friday, your total potential earnings per contract is $2.60 or 108.33 per cent! The only risk is $2.40 per contract (or $240), a safer bet than shorting the stock.