High-Beta Netflix and Amazon

Playing the Expiry: July 13, 2012

7-Eleven Day (July 11) brings free Slurpees to everyone around the world. And today, it brings free options suggestions.

A strangle on Netflix [NFLX:NSD] is back in play. After rising 20 per cent in three days at the start of July, the stock has flagged and traded sideways. The flag pattern may break out before the week, but that shouldn't stop risk-takers from making that bet.

The stock is $82.50, trading right smack in the middle of the spread. The 80 put is slightly under valued at $0.73 compared to the call at $0.84. The maximum return for this strategy would be $157 per pair. Total margin required is approximately $4,000. The maximum return is 3.93 per cent. The break-even range is $78.43 to $86.57 or downside and upside protection of 4.93 per cent.

Amazon [AMZN:NSD] continues to rise and fall in the low $200-range. Starting the week above $224, it has fallen with the market and recently touched $217. However, if the market is truly sideways as claimed, Amazon should move above $220 after hitting support in the current range. The 215 put is about $1.20. Total margin is about $6,250. Maximum return is 1.92 per cent. The strategy protects a fall of 1.47 per cent post-3 per cent decline from Amazon this week. That suggests Amazon has a low probability of falling further in the shorter term.

Disclaimer: I have implemented the above strategies. I am also short Amazon. Writing naked options is not for everyone. Always consult a professional before making uninformed decisions.