When Your NFLX Trades Go Against the Grain, You Could Reap 100% Gains

Shah Gilani|April 25, 2022

Sometimes, the best short-term trades are simply a matter of going against the grain.

When everybody is on one side of a trade, there comes a point when the best risk/reward scenario comes from betting against the herd.

Legendary investor Jim Rogers compares this to everyone getting one side of a boat. When that happens, he says you probably want to be on the other side of that same boat…

Or risk getting dumped in the water as the boat tips.

Speaking of investors all being on one side of the boat, Wednesday was a pretty darn spectacular day where Netflix Inc. (NFLX) is concerned. The company reported results for the first quarter that missed various estimates, and the stock dropped nearly 40% before rebounding slightly in early Friday trading.

That’s what I call a serious beatdown. An overblown beatdown, at that, but we can use it to our advantage.

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The Boat Is Tipping

For the quarter, the company reported revenue increased nearly 10% to $7.87 billion, but the stock dropped 40%.

Net income during the quarter fell 6.4% to $1.6 billion, and the stock dropped 40%.

Excluding items, the company earned $3.53 per share, well above the $2.89 per share analysts had expected, but the stock still lost 40% in two days.

At issue was that the company reported losing 200,000 subscribers during the first quarter, its first decline in paid users in more than a decade. Additionally, the company is forecasting a global paid subscriber loss of 2 million for the second quarter.

Even if the company does lose 2 million subscribers, that’s less than 1% of the company’s 220 million paid subscriber base – and the stock lost 40%.

I’m not saying NFLX isn’t in trouble, but a 40% haircut is way overblown.

Clearly, the majority of investors are on one side of the boat, and I think we could see a short-term bounce to the upside.

At this point, let’s buy the NFLX June 17, 2022 $225/$230 Call Spread for $2.25 or less. Plan on selling the NFLX June 17, 2022 $225/$230 Call Spread for a 100% profit or if shares of NFLX close below $210.00.

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Editor’s Note: If you’re unfamiliar with trading spreads, you can learn more by reading our options guide, which you can find by clicking here.

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I’m also watching Roku, Inc. (ROKU), another streaming provider.

If we see any rebound in shares of NFLX, we could easily see a rebound in ROKU, which is trading just above recent support at $97.90.

As with NFLX, I’m not saying the ROKU is a great long-term investment. I’m just saying the NFLX effect feels overblown, and we could see a pop to the upside as bargain-hunting traders move in to make a quick profit.

At this point, I like buying the ROKU June 17, 2022 $105/$110 Call Spread for $2.25 or less. Plan on selling the ROKU June 17, 2022 $105/$110 Call Spread for a 100% profit or if shares of ROKU close below $97.00.

As I mentioned at the top, bottom-fishing, like I am recommending today, can be risky.

There’s no guarantee NFLX or ROKU are going to rally. Make sure you don’t allocate any more than 1% of your trading capital to either of these trades, and make sure you exit if NFLX or ROKU close below $210 or $97.00, respectively.

Cheers,

Shah Gilani