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Netflix (NASDAQ:NFLX) has been on quite a rollercoaster ride over the past decade. Since 2002 revenue has increased 20-fold as the company went from being a DVD mail-rental company to a content streaming company. During that time the stock took part in a meteoric rise, reaching nearly $300 per share in the middle of 2011. At that share price the company was valued at around $16 billion. Any reasonable person at the time, after having looked at the fundamentals, would have concluded that the stock had become absurdly overpriced, and indeed the stock soon tumbled.

NFLX Chart

NFLX data by YCharts

Netflix faces a series of challenges today, from rising content costs to competitors such as Amazon (NASDAQ:AMZN). Much of this is probably a bit overblown. As of July Netflix has 23.3 million subscribers in the US and 3.6 million internationally. In the second quarter of this year Netflix added over 1 million total subscribers to its streaming services. Amazon, on the other hand, has only around 5 million Amazon Prime subscribers, a service which includes streaming of TV and movies. In addition, Netflix is creating its own content, such as a new season of Arrested Development and original series House of Cards. This strategy allows Netflix to have content which no other service has, differentiating itself from competitors. Although Amazon is a serious competitor, the company's ever-shrinking margins are not a good sign.

Although it's difficult to put a value on Netflix, it's currently possible to make a 20% annualized return by selling puts on Netflix with a $45 strike price. This would allow an investor who believes in the long-term prospects of Netflix to open a position at a significant discount to today's price.

Selling Puts

Below is a set of put options with a $45 strike price

Expiration DatePremiumAnnualized Return
Oct 2012 (40 days)$0.5310.74%
Dec 2012 (103 days)$2.6020.47%
Jan 2013 (131 days)$3.0018.58%
Jan 2014 (495 days)$9.4015.40%

By selling the Dec 2012 $45 put you receive a premium of $260 dollars (options are in blocks of 100 shares) and $4,500 is tied up for 103 days. Two possible outcomes could occur.

  1. The stock price never falls below $45 and the option expires worthless. You are not required to buy any shares and are free to write another put.
  2. The stock price falls below $45 and the option is exercised. You are forced to buy 100 shares of Netflix at $45 per share, which will be higher than the current market price. The premium which you receive effectively lowers your purchase price to $42.40 per share.

The premium received represents a 20.47% annualized return (5.78% over 103 days).

Conclusion

If you believe that Netflix is a strong long-term investment then this strategy allows you to have the chance to buy shares of Netflix at $45 per share, more than 20% lower than the current market price. In addition, you receive a premium which, annualized, gives a return of 20.47% on your $4,500 investment. For those bullish on Netflix's long-term prospects, this put-writing strategy is a win-win.

Source: Get Paid 20% To Buy Netflix For $45 Per Share