Netflix Calendar Spread: A Smart Play for a Neutral Outlook

Netflix (NFLX) stock has been pretty flat in the last few months and investors that think that trend could continue, might consider a Calendar Spread.

Calendar spreads are an option trade that involves selling a short-term option and buying a longer-term option with the same strike.

Traders can use calls or puts and they can be set up to be neutral, bullish or bearish with neutral being the most common.

When doing bullish calendar spreads, we typically use calls to minimize the assignment risk. Likewise, if the calendar is set up with a bearish bias, we use puts.

Neutral calendars can use calls or puts, but calls are more common.

Let’s look at an example using Netflix.

Netflix Calendar Spread Example

With Netflix stock trading around $75, setting up a calendar spread at $75 gives the trade a neutral outlook.

Selling the September 18 call option with a strike price of $75 will generate around $335 in premium, and buying the October 16, $75 call will cost approximately $490.

That results in a net cost for the trade of $155 per spread, and that is the most the trade can lose.

The estimated maximum profit is $195, but that could vary depending on changes in implied volatility. 

The idea with the trade is that if NFLX stock remains around $75 for the next few weeks, the sold option will decay faster than the bought option allowing the trade to be closed for a profit.

The breakeven prices for the trade are estimated at around $70.50 and $80.70 but these can also change slightly depending on changes in implied volatility.

In terms of trade management if NFLX broke through either $70 or $80, I would look to adjust or close the trade.

Below is the payoff graph with the blue line representing the profit or loss at expiration and the purple line being the trade as of today.

Netflix Company Details

The Barchart Technical Opinion rating is a 88% Sell with a Weakening short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Relative Strength just crossed above 50%. The market is indicating support for a bullish trend.

Mitigating Risk

Thankfully, calendar spreads are risk defined trades, so they have some build in risk management. Position sizing is crucial to ensure that minimal damage is done if the trade suffers a full loss.

One way to set a stop loss for a calendar spread is close the trade if the loss is 20-30% of the premium paid. 

Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.