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Special edition – Netflix separation anxiety attack

{ 13 comments }

*added sountrack, play while you read*
*Netflix is pushing 180 four days after this was first posted.*
*1/31/2011 update. I sold the 2nd half of my position at 208. I’m pretty happy with the way it turned out. 🙂 *

Thursday morning, I sat down in my slightly depressing gray cubical and logged in. What do I see?
Netflix is up 20 points!!!
Urghhhh!!! I guess I should be happy, but….

Lighting flashed though my head – this sucker is going to drop 20 points tomorrow, I gotta hedge my bets and figure out how options work RIGHT NOW and put in an order!

Am I over exclamating? I was all hopped up on adrenalin.

Logged on to my broker site and found the option tab. Tried to put in an order and I saw this message – you need to enable option trading on your account. OOoooKKkkkk, fine more time for me to figure out options. Found the option trading form, fill it out tonight, fax it in.

Back to figuring out what to do with NFLX. I really want to keep the stock because I think it will go up in the long term, but the PE ratio is 70!! This is getting close to the dot-com bubble territory.

My stock investment strategy is buy and hold. I know this is not always optimal and I always have separation anxiety especially if I held it less than one year. I just can’t bear to sell a stock and pay the 28% short term capital gain tax.

So I IM’ed my buddy Al and he replied- “just sell it. You just have to pay the tax…”

Left to myself, I probably would have held NFLX and stewed all day, but with Al’s advice I got the calculator out.

Purchased NFLX on Jan ’09 at $52 per share.
If I sell at 172 (for simplicity’s sake) I would make a profit of $12,000.
Short term capital gain tax at 28% would be around $3,400!
Holy moly, NFLX would have to drop to 34 points for me to lose that much. What to do, what to do?

Compromise – I sold 50 shares, took the gain and pay the tax.
> I get to keep 50 shares of the stock I like
> I took some profit that I can use to diversify my portfolio and reduce risk exposure
> Send some money to my emergency fund which was a little low
> Sleep a bit better tonight

lesson of the day
> enable option trading on my account so I don’t have to agonize over the selling. Find out as much as I can about how to buy put options to hedge my gain.
> Thanks Al! You are a wise and handsome man. 😀

Investors, what would you do if you were in my shoes? I am not very familiar with option trading; can you tell me what could go wrong if I buy a put option with the strike price of 150?

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{ 13 comments… add one }
  • ABD October 22, 2010, 1:10 pm

    Personally, I would rather have a diversified portfolio and hang on to everything for as long as possible until I needed it – but that’s a totally different strategy than active trading!

    You are going to have to pay the capital gains tax eventually, right? If you sell it later for the same $12,000 gain, true, the tax in future dollars is not worth so much today, but then, the profit in future dollars would be worth less by the same percentage. If you can use the cash for a more profitable investment than keeping it in that stock, I would go ahead and get it out. (Unless you think capital gains tax is going to drop lower in the future.)

    I like your idea of selling 50% and using the money to diversify, especially if you are not very diversified already.

    • retirebyforty October 22, 2010, 2:06 pm

      Yes, I have to pay capital gain in any case, but if I wait until Jan ’10, then it would be long term capital gain. The rate is 15% now, but could possibly go up to 20%. Either is quite a bit less than the 28% rate.
      My portfolio is pretty diversify, but the PE ratio at 70 is way too high right now.
      I think selling 50% is a good compromise for now, but put options would be a good choice also.

      By the way, NFLX only dropped 4.6 points today, not 20 like I worried about.

      • ABD October 23, 2010, 6:35 pm

        I was thinking about this today and then realized that long-term vs short-term might have something to do with it. I understand the pressure of this questions a lot better now.

        The return is enough to still be a good return after the higher taxes though, and the “key” is to sell high, right? (If you can figure out when that is.)

        Even if it turns out not to go down by January, I don’t think that selling would be a decision to regret.

  • Barb Friedberg October 24, 2010, 4:23 pm

    Have you thought about indexing? There’s a lot of research supporting the benefits of a diversified portfolio of index funds. Good luck with your portfolio!

    • retirebyforty October 24, 2010, 6:16 pm

      80% of my investments are in various funds. Netflix is just of of the stocks in the portfolio, but it was starting to out weight other stocks. I’m pretty glad I decided to sell some of it.
      I’m still hoping for some input on using options as a hedge tool. I’ll do some research.

  • The College Investor October 24, 2010, 6:57 pm

    Ooohhh the pain of letting go! I have been there so many times it is hard to count. I now stick with a disciplined trading strategy where I set a price target and sell at that point. I do miss out on some runs, but it saves me from the emotional roller coaster.

    As for your options trading, do your homework.

    For Netflix, you have the option of weeklies or monthly options (they are as they sound, the weekly expires on Friday, the monthly for November on 11/19/10).

    You can currently (10/24/10) purchase a Weekly 150 Put for $0.46 per contract. A contract is 100 shares, so it would cost you $46 plus commission. It is so cheap because Netflix is currenly trading at $168.10, so it would require an almost 11% drop to be in the money.

    The November 150 Put is trading at about $2.46 a contact. If you thought a 10% drop will occur over the next month, it will cost you $246 to buy 1 contact, or 100 shares. To break even, the stock price would actually have to sink below about $147.

    When buying a put, you max loss is the cost of the put (in this case about $250). You max profit is if the stock goes to $0, which in this case would be $14,747!!! Hahaha, as if that would happen, but you get the picture.

    Hope this helps. Let me know if you have any other questions!

    • retirebyforty October 24, 2010, 7:53 pm

      College Investor,
      Thanks for the example, it’s really helpful. None of my friends are trading options so I am not very familiar with it. I have read over the years about using it as a hedge too, but never got into it.

  • Eric October 25, 2010, 9:16 am

    I am a big fan of a trailing stop on an investment like this. I would personally rather take $12,000 less taxes for an ~8,500 profit than watch the stock fall just to save on taxes.

    Past performance should never impact your decision on whether to keep or hold a stock. Do an analysis and decide whether you would buy the stock today. If the answer is yes, hold it. If the answer is no, sell it.

    • retirebyforty October 25, 2010, 8:44 pm

      Yes, good advice. I need to keep that in mind and not get too emotional about it. (do an analysis)
      thanks

  • Roshawn @ Watson Inc October 26, 2010, 6:43 am

    Oh the joys of stock investing! I can empathized with the pain of selling “too soon” (I index personally) . Taking some of your profits now seems completely reasonable to me despite the tax implications. The old adage “a bird that’s in the hand…” comes to mind.

  • retirebyforty October 26, 2010, 12:30 pm

    Thanks everyone for your advice and comments.
    I’m going to add a theme song to this Netflix post. The price is heading toward 180, unbelievable.

  • MoneyCone December 8, 2010, 11:57 am

    I recently sold BIDU… same reason – PE is too high for my comfort. The first thing I did was remove the symbol from my watchlist! Only way to heal separation anxiety!!!

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