Rolled NFLX Naked Put

I sold a naked put $10 out of the money on Netflix ($NFLX) on December 12, while NFLX was trading at $185.70 and on January 2, NFLX gapped higher and has barely hit a speed bump since then. It finished $0.30 higher today, but that was $4.54 below its intraday high. I’ve been hesitating to chase my next trade on NFLX since stocks have been on such a great run for so long, but decided I needed some more skin in the game finally. While NFLX was trading at $224.20, I sold one NFLX March $205 naked put for $5.30 and received $529.31 after paying $0.69 in commission.

Even with this naked put being more than $19 out of the money, I can still make 2.65% (15.49% annualized) on the money I’m keeping in reserves. NFLX can fall 10.92% before I lose a penny. I considered taking more risk and aiming for a higher strike, but 15%+ is where I’d like to be on an annualized basis. The rumor of a NFLX buyout is what got the stock moving at the beginning of the year and I think that fuel for the stock price will ease off and it should come back into line with its previous trading channel, which would bring it as low as $200 (maybe as low as $196 if the price declines more quickly than I think it will) before finding support. My cost per share if assigned would be $199.71, which is why I chose the $205 strike on top of hitting my annualized return goal if the trade works for me.

The 50% retracement line using Fibonacci lines is around $202 based on the early December intraday low and today’s intraday high. I expect that line to hold support, if not the 38.2% Fibonacci line at $196.50. I wouldn’t mind seeing a little retracement, just so I can roll the put at a better strike and better premium in March. By the time NFLX announces earnings, I think it should be ready for another leg higher, simply based on their 10% subscription fee increase that I doubt will cause any subscribers to cancel their plans.

Originally, I was planning to keep my February naked put and let it expire worthless, but after thinking about it for a minute, I decided it was smarter to reduce my risk in case NFLX hit a wall. While NFLX was trading at $224.10, I bought to close my one NFLX February $175 naked put for $0.55 and paid $56.09 including $1.09 in commission. I don’t think there’s much of a chance NFLX could fall 22.15% by February expiration and cause me to lose any money from today’s option price, but I didn’t see the need to hold onto the risk for a 0.31% (1.81% annualized) potential gain.

On a broader market view, the S&P 500 fell 1.39% from its intraday high before recovering slightly to close down 1.11% from its morning peak. Since I’m so lightly invested now, I’d love to see a much better correction than only 1.39%. The market is on such a long steady rally higher that a solid 3%, or better yet 5%, mini-correction would be great for this account. I only have two options set to expire this coming Friday and I’m going to let them expire worthless, but I need to find other investments to add to my account sooner than later. I might go for something that seems fairly bland, like WMT, since its options offer reasonable returns. I’ll see what the next couple of days bring for price change and would like to get another trade in this week.

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