Weekly Issue: Adding a layered approach to our Netflix strategy and new position in IFF
Key points in this issue:
- We are adding the Netflix (NFLX) Jan 2019 350 calls (NFLX190118C00350000)that closed last night at 30.80 to our holdings. We would be buyers up to 35.00 for these calls and to manage risk we’ll set a stop loss at 24.00.
- As we do this, we will continue to hold our existing call position that is Netflix (NFLX) Jan 2019 400.00 (NFLX190118C00400000)calls that closed last night at $13.40.
- We are adding the International Flavors & Fragrances (IFF) Nov 2018 135 calls (IFF181116C00135000)that closed last night at 3.50 to our holdings. We are employing a stop loss at 2.50 and are not inclined to chase these calls past 5.00.
- We will continue to hold the Costco Wholesale (COST) January 2019 230.00 (COST190118C00230000) calls hit 10.85 as of last night’s close. Given the 64% gain, we’re adding a stop loss at 8.50 to lock in a minimum return of at least 29%.
A layered approach to Netflix calls
In yesterday’s weekly issue of Tematica Investing, we scaled into the shares of both Applied Materials (AMAT) and Netflix (NFLX). Today at Tematica Options+, we’re going to add a layered approach to our existing Netflix call option play add a new call option position in shares of International Flavors & Fragrances.
The easy temptation would be to scale into the existing Netflix position in a move that would lower our cost basis. Rather than do that, we’re going to use the double-digit drop in the shares following its June quarter earnings report to our advantage.
Unlike NFLX shares, which are the only shares one can buy in Netflix the company, with options we have various strike prices and dates to choose from.
In this case, the call option that I’m selecting is one that is modestly out of the money vs. the current NFLX share price of $344.44. That means the 350 strike price.
In terms of timing, Netflix will have a plethora of original content hitting its streaming service in the coming months. Yes, a fair amount of it will be geared toward its international exposure as the company targets those subscribers but there will be new content for the domestic market as well. Based on the historic seasonality seen in the company’s subscriber growth as well as earnings, we’re going to stick with the existing strike date in January 2019.
- Putting these two pieces together points to the Netflix (NFLX) Jan 2019 350 calls (NFLX190118C00350000) that closed last night at 30.80. We would be buyers up to 35.00 for these calls and to manage risk we’ll set a stop loss at 24.00.
- As we do this, we will continue to hold our existing call position that is Netflix (NFLX) Jan 2019 400.00 (NFLX190118C00400000)calls that closed last night at $13.40.
A new call option position in IFF shares
We recently added back shares of International Flavors & Fragrances (IFF), which as its name suggests is a company focused on flavors and fragrances. We recently addedIFF shares back to the Select List as part of our recast New Middle Class investing theme, but what the company’s name doesn’t share is its growing focus on natural and organic products. As a reminder, this past May IFF acquired Frutarom, a flavor, savory solutions and natural ingredients company that sells over 70,000 products to more than 30,000 customers in over 150 countries. The combination of the two businesses creates a global leader in taste, color, scent, and nutrition that is a leader in natural solutions.
If you’re thinking IFF sounds like it’s not only riding our New Middle-Class theme but also our Clean Living one, well…. Let’s just say that you are thinking like I am.
Over the last week, the Clean Living investing theme has been a high profile one given two major M&A transactions. The first was privately held Cava Mezza Grill acquiring publicly traded Zoë’s Kitchen in a transaction worth $300 million. The combined company will continue to focus on healthy fair with a hefty dash of Mediterranean influence. The second was PepsiCo (PEP) buying SodaStream (SODA), and if you missed that news I talked about it in this Thematic Signal from a few days ago.
Here’s the thing, these are the two latest in a growing list of acquisitions by companies that are looking to improve if not emphasize their exposure to our Clean Living investing theme. As more companies look to bring all natural products to market, we see that boding very well for IFF shares. With the accelerating shift in consumer preference toward Clean Living that is forcing companies to respond — including new beverage products by PepsiCo, Coca-Cola testing a new Dasani Free beverage machine(yes, another Thematic Signal) and other initiatives, not to mention re-formulated food, cosmetic, and cleaning products from other players – I see a pickup in demand for IFF’s improved natural portfolio of flavors, colors, and fragrances. That has me adding the International Flavors & Fragrances (IFF) Nov 2018 135 calls (IFF181116C00135000) that closed last night at 3.50 to our holdings.
- We are adding the International Flavors & Fragrances (IFF) Nov 2018 135 calls (IFF181116C00135000)that closed last night at 3.50 to our holdings. We are employing a stop loss at 2.50 and are not inclined to chase these calls past 5.00.
Adding a Stop Loss to our Costco calls
With last night’s close, our Costco Wholesale (COST) January 2019 230.00 (COST190118C00230000) calls hit 10.85, which leaves them up some 64% since we added them to our holdings on Aug. 1. While I still see ample upside in the position as we move into the shopping filled last four months of the year, I’m adding a stop loss at 8.50, which will ensure a 29% gain should things go awry. I don’t expect it, but better to be safe than sorry.
- We will continue to hold the Costco Wholesale (COST) January 2019 230.00 (COST190118C00230000) calls hit 10.85 as of last night’s close. Given the 64% gain, we’re adding a stop loss at 8.50 to lock in a minimum return of at least 29%.
