Where Will Netflix be Trading in 2014?

We all know options can be a great way to generate income , as Ive written
about before . We also know options can be a useful tool to hedge your long
stock positions. Theres another great play that uses options that I reserve for
very speculative situations, including one that Im facing right now. Thats when
I like to use LEAPS (or, longer-term options). One of the tricks with options is
that you may make a correct call on a stock prices movement, but have the time
frame wrong. By using a longer-term option (through which you can get up to an
additional two years' worth of time with your position), you can protect
against that mistake. Of course, since options are priced according to time
frame, it means this alternative will be more costly. Thats why I only go for it
in highly speculative situations where my risk in using just a straight stock
purchase or shorting is unlimited. With LEAPS, I can easily limit that risk. The
best way to illustrate the use of LEAPS is to use a real example a situation
that is in play right now. It involves Netflix (NASDAQ: NFLX ). Theres been a
lot of speculation as to whether Netflix is going to survive and thrive … or
struggle but survive … or die quickly … or even die slowly. The easy money
has been made if you shorted when the stock was in the $200s or even the $100s,
youve done well. But how do we play it from here? My own opinion is that Netflix
is going to go bankrupt, and it is likely to happen in the next two years. The
problem is that, in the interim, the stock may jump from the $60s, where it is
now, to over $100. Who knows? I could short it and set a stop-loss, but if the
stock should gap up on the open, itll blow through my stop-loss. I want a
situation where I dont have to risk as much as I might shorting the stock, but
which bets on a complete implosion. So far, Netflix has shown a tendency to drop
by double-digits on days with bad news. I think thats going to continue. So,
I'm looking at buying the NFLX January (2013) 65 Puts , which are selling for
$20 per share, or about $2,000 per contract. That means if Netflix craters to
$45 by then, I will break even. In fact, if it does so before January 2013, I
may even be able to sell it for more than $20, given the time value of the
option that remains. And if NFLX should totally implode and go to zero, the put
will be worth $65, and I will more than triple my money. Thats one way to play
it. But an even-better choice is the January (2014) 65 Puts , which are selling
for about $25. With the 2014 expiration, I get an extra year on my option for
only $500 more. I break even if the stock hits $40 on expiration, and maybe make
something if it does so before expiration. Once again, if the stock goes to
zero, I will make $65 for the contract, and more than double my money. You can,
of course, buy calls that are way out-of-the-money (that is, with strike prices
that are higher than the market price of the shares) on stocks you think might
go much, much higher without risking the capital to buy the stock. Again,
though, save these LEAPS for very speculative situations. Lawrence Meyers does
not currently have any positions in NFLX.