I am referring to the risk of some material news. The stock could easily blow through 45 and you're sitting on 300 deltas should the stock trade to your strike. Then you're risking $300 per point. I have no opinion on NFLX, but if I were in Sep and looking for some upside I would look into some defined-risk spread.
NFLX Compare Naked Short Put....Bull put Spread (BPS) ATM and DIM Sept Expiration ...........Short 45 put......45/40 BPS......Short 55 put....55/50 BPS Cost...........4390...............438..................5500.................318 Price...........................................................................................Prob 35.............(863).............(438).................(1544)..............(318).......97% 40.............(370).............(438).................(1058)..............(318).......91% 45..............110...............62....................(572)................(318).......81% 50..............110...............62....................(86).................(318)........67% 55..............110...............62.....................407..................182.........52% 60..............110...............62.....................407..................182.........36% Cost = required security in a cash account Prob = Prob that price is > strike given past price distribution I leave calc of yield and expectation to the reader Choice leaps to the eye... at least to my eye anyway.
To much downside risk for me. Cash secured not naked you mean.. there is an opportunity cost to leaving all that money tosecure the put.. I just think to myself Netflix is in a highly competive dying market with DVDs and so many big companies are looking for market shaft... no such thing as network neutrality... I would at least turn it into a wide strike credit spread myself...
Perhaps i should turn it into a super wide spread. I'm looking at the $37.5. Thanks for the feed back.
Sold puts on $15 WMS for Sept Credit $0.35 Annualized % return.... 14 - 15% I like the tech support in the $15 area per the 5 year chart. http://finance.yahoo.com/q/bc?s=WMS&t=5y&l=on&z=l&q=b&c= I also like the companies slot and video poker products, as they are creative and entertaining. I anticipate more slot and vp sales, as more states legalize gambling for income, and of course the continuous replacement cycle machines go through, as players always want to see the latest product. At the moment, the only thing slowing down product replacement, is the so-so health of many casino companies. But they can only hold off for so long. As soon as one company buys or rents the newest product, they all have to, or risk losing their customers. BTW, I paid $0.30 for the $37.5 put to create a $45/$37.5 spread on NFLX. You were all right. The stock is too volatile to risk going naked. Especially since this was a pure technical trade, vs my usual tech and fundamental combination. I'll probably still buy it if it trades between my strikes, but it's best not to risk the "teens" or worse on such a volatile stock. Thanks again all.
think about the ease of rest you get from just a .30 cent option purchase! its a great idea you hedging a jump .. hell it might not happen but it sure will make sense if it does..
Just for a bit of context, the $0.30 put protection represents 1/3 of my potential profit. However, that was my fault, as it would have been less of an expense, if i had initiated the spread at the same time vs legging into it. I was doing only spreads over the past few of years. But I found I was using all my investment cash on them, just like I would when selling a naked or cash secured put, or buy/write type investment. There is absolutely NO WAY to ever buy all, or even 1/3 of those spread trades, if those stocks traded between or just under my strikes So I had no choice but to close them for losses, anytime I got nervous about what the market was doing. Remember those 300 - 500 down days when S+P downgraded our debt??? If i had instead been naked on those trades, i could have bought them all and waited for the market to bounce back.... which it did. So my point is, i don't like losing control of my "choices" when doing spread like trades. I like having the "choice" of whether or not i want to buy my investments until they recover... either naturally or via calls. But I agree spreads are the wise thing to do, when investing in a volatile stock or sector. I wasn't thinking clearly, treating a volatile stock like NFLX, like I treat my more fundamentally sound stocks.
That's the advantage of a spread, you have total control when you enter the trade. You know the potential maximum loss and profit and you don't need to make any more choices. It's all in one neat package.
<<< I was doing only spreads over the past few of years. But I found I was using all my investment cash on them, just like I would when selling a naked or cash secured put, or buy/write type investment. There is absolutely NO WAY to ever buy all, or even 1/3 of those spread trades, if those stocks traded between or just under my strikes So I had no choice but to close them for losses, anytime I got nervous about what the market was doing. >>> Just one other point: Assume an invesment portfolio of lets say $100,000. Assume you do the smart thing and don't risk all your cash in spread type investments,... because you can't possibly buy more than 1/3 of them. So you only use 1/3 your cash. That means if they were all 100% successful for the entire year, earning a 15% annualized return on each trade, you might assume you'd end the year with a 15% return,.... or $15,000 minus commissions. But in reality, if you only risk 1/3 of your cash, so you have the choice of buying them temporarily, then you will only end the year with a 5% annualized return, or $5,000. In order to earn that 15% return, you'd have to risk your entire $100,000 bankroll, and thus risk getting almost wiped out, because you'd have to close almost everything for a partial or massive loss, if a sudden market event got you nervous. Because you can only buy a few of those trades. Hence, my point being, a portfolio of 100% spread type investments, using all your investment cash, take away your ability to CHOOSE a plan "B" type alternative during sudden market volatility. Personally, I don't see "rolling" under that type situation, where your entire portfolio cash is at risk, to be much of a plan "B". Any thoughts. Am I missing something?
BTW, I realize you can construct a half bullish and half bearish portfolio, but it's also risky taking a bearish stand just for the sake of being bearish. Hence the reason I prefer a strategy of only selecting stocks i think won't drop too much below a specific strike.... using TA and fundmental analysis. And having the "choice" of holding them temporaily during a potential volatile market that occured near expiration day. I find that's more stabliizing and predictable than guessing how high a stock might climb, and risking cash on a potential limit. That's too much of a dart throw for me. Hence my prefered strategy of mostly only investing in stocks I would not mind owning temporarily, during difficult times, at those specific prices. I like having the CHOICE of whether to sell or buy. A portfolio of spread type investments take that choice away. It's great to know a max potential spread loss is predetermined and limited. But that limit may be most of your portfolio. Or you can only risk 1/3 of your cash, so you have the CHOICE of buying or selling most of your trades during a downturn. But now you are only generating income on 1/3 of your cash. What will that do to your hoped for year end % return on that $100,000 portfolio I mentioned earlier?