Sold Bearish NFLX Vertical Call Spread

The good news I finally opened a short position on Netflix (NFLX).  The bad news is I’ve been considering this trade for a long time.  Ever since NFLX changed their pricing plan and pissed off almost all of their subscribers I could tell it was a doomed stock.  I don’t know why I didn’t react then.  Most people I’ve spoken to have said they were either reducing their service plans or just dumping them out of spite.  We reduced our plan so far and will probably end up cutting it again at some point in the near future.

After I received the CEO’s letter yesterday that reeked of panic I decided I couldn’t put off the trade any longer, but still waited another day.  Finally, while NFLX was trading at $135.80 I sold one NFLX October $130 call for $17.35 and bought one NFLX October $140 call for $12.25 and received $508.52 after commissions.  I thought about being more aggressive since I believe NFLX has a lot more downside to it, but figured risking $491.48 with the potential to make $508.52 is good enough for now.  I won’t be surprised if I close this out early after NFLX falls deeper.

The company’s logic of this change just doesn’t make sense to me.  They are separating two business lines which is likely to lead customers to cut one side.  The likely way this will play out is a massive loss of revenue from current subscribers cutting services, not to mention the loss from irritated customers who just got out entirely.  NFLX has a trailing P/E ratio over 33 and a forward P/E ratio around 19.  I’m not giving their forward earnings estimates much credit for accuracy and expect a big miss.  The catch on this trade is that NFLX next earnings call isn’t until after October expiration.  I won’t be surprised to see them pre-announce a revision lower.  Yahoo! Finance still shows 11 analysts rating it Buy or Strong Buy.  Those analysts will likely jump on the bandwagon soon and clue in to NFLX’s dark future.

As confident as I am that NFLX will continue to loose value, I’m not stupid enough to do this as a blind short.  Stranger things have happened and NFLX could turn around.  I don’t think it has more than a 5% chance of doing that, but as fast as it came down, the reversal would be extremely painful.

My other plan last week was a bullish vertical spread on AAPL.  Clearly I haven’t gotten to it yet and now it’s up another $25 from where it was when I thought about making the trade.  Investors have a love affair going on with AAPL, but it seems to be deserved.  Their forward P/E ratio is less than 13 and I wouldn’t be shocked for them to beat estimates to drive that number even lower.  Their competitors are dropping like flies and they don’t seem to be slowing at all.  I might go ahead and enter a limit order to try to catch a random dip.