aelius
Long

Trading NFLX with the Least Possible Risk

In my personal life all my friends were selling their cable TV just to subscribe to an on-demand entertainment service such as NASDAQ:NFLX and this encouraged me to look for potential trades related to this idea. I decided to place a spread trade on my watchlist during early 2016: (NFLX/VIAB) and I have had the actual trade on for about 4 1/2 months and it is a play on the current trend in the entertainment industry.

You might think that NASDAQ:NFLX is the obvious trade to express my idea but this is an exception due to the fact it has the best fundamentals in the industry; a huge PE ratio compared to it's counterparts, forecasted increase in earnings growth of 100%+ in 2017 and the due to the cyclical nature of the stock the ISM and other indicators are basically telling you that the spread follows the business cycle and looking at the data I'm sure the economy should be very healthy in the coming year which means this trade could stay as a live position for at least 3 more months minimum.

When it comes to the risks involved I choose to implement a spread trade instead of just going long NASDAQ:NFLX due to the fact the potential reward could be far greater if I shorted a failing cable company stock. I came across viacom which is a company that runs cable TV network channels such as MTV and Comedy Central. If you've ever watched these channels in the UK you will have noticed all they do is just play reruns endlessly of Friends and Pregnant at 16, not exactly the most exciting company in the world although I do enjoy the odd episode of Friends!

The fundamentals of the VIAB stock the market seems to agree with my point of view. Traders are buying/selling NASDAQ:VIAB at a whopping 50% discount to the sector! Don't fall for the guys on TV saying this stock is "cheap", it's at that PE ratio because everyone is shorting it to hedge out risk and are going long NASDAQ:NFLX or another intra-sector constituent such as NASDAQ:FOXA . The PE ratio is low because the company earnings are low quality not because they are cheap. I wouldn't be surprised if this was the most popular spread trade for hedge funds right now who are looking at the entertainment sector. In shorting NASDAQ:VIAB I have taken must less risk going long and short the market and entertainment industry related stocks and I have made a sizable return so far. It all comes down to NASDAQ:NFLX earnings on Jan 16th as to whether I increase my position even further.

Would I recommend putting this trade on? Yes, but please do your own research and go through the fundamentals I have mentioned for yourself and see if you agree with me. In terms of timing and technicals its just a matter buying at the low of the uptrend. What's your take on this trade, maybe you have a similar trade on, let me know!


Comment: Time to double my position :D
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