Daily Gains Letter

How to Limit Risk and Profit from Momentum Stocks Like Netflix

By for Daily Gains Letter |

Momentum Stocks Like NetflixIn the past, I have often talked about the quick money that can be generated trading big-volume momentum stocks in the Internet and social media spaces. Take a look at the biggest companies by market-cap on the NASDAQ and S&P 500, and you’ll find numerous highflying, valuation-defying stock market trades.

Of course, I’m talking about the likes of Facebook, Inc. (NASDAQ/FB), The Priceline Group Inc. (NASDAQ/PCLN), Twitter, Inc. (NYSE/TWTR), LinkedIn Corporation (NYSE/LNKD), Tesla Motors, Inc. (NASDAQ/TSLA), and Netflix, Inc. (NASDAQ/NFLX). Apple Inc. (NASDAQ/AAPL) is not in this group because the stock’s gains tend to be steadier, rather than in spikes on the stock market.

Just look at Netflix last week. The provider of video streaming to the global market has been delivering massive results. There was no reason to believe that this would not be the case for its first quarter. If you played the stock prior to the earnings release on Wednesday after close, you could have made tons of money via the stock or call options.

Buying Netflix at the $475.00 level on Wednesday during the normal session would have seen the price surge by $67.00, or 14%, to $542.00 by the morning on Thursday. That’s a $6,700 profit on 1,000 shares and $67,000 in easy money for an overnight trade of 10,000 shares. Even a small player buying 100 shares could have made $670.00 in quick cash. And more could have been made if you had played Netflix via the April 18 call.

Netflix Inc Chart

‘Netflix, Inc. short-term chart,’
Chart courtesy of StockCharts.com

The point I’m making here is that momentum plays like Netflix provide exceptional risk-to-reward trading opportunities to make some quick money if you are on the right side of the trade. The use of call options may be suitable for traders who want leverage and manageable risk in case the trade goes in the other direction.

FBR & Co. came out with a crazy $900.00 price target on Netflix based on expectations that the company will be able to continue to deliver high growth rates in subscriptions worldwide.

The situation with Netflix is not stock-specific; you can use these strategies with nearly any highflying momentum stock, some of which I previously listed. But investors also need to beware of the extreme risk in the case that the company fails to deliver exceptional results to the stock market. This is key. Traders will only wildly bid up a stock when the results are exceptional. This may not work so well if results are simply in line with expectations.

The key is to make sure you understand the inherent risk factors if you are wrong. Otherwise, for experienced traders, playing the earnings game can provide exceptional opportunities in the stock market.

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