NFLX

Netflix has been one of the hottest stocks over the past year, going from $48-$211. It is up $25 today after reporting earnings last night. Probably people covering their short positions as 25% of the float is short. It currently trades at 78X trailing earnings and has a forward p/e of 54.

I wish I had bought a ticket for the NFLX train a year ago, however, it is getting pretty crowded now and people should get off while they still can. A few problems that could cause Netflix to slip up in the future are:

1. streaming content is weak. New movies come out 30 days later than Redbox, and typically don't come out on streaming until 6 mos later. As NFLX forces subscribers to streaming only plans, they need to come up with more popular content or risk losing those subscribers.

2. Future margins are going to be squeezed as content owners demand more money for the right to license their content. If netflix wants the best content, they are going to have to pay a lot more for it then they are currently paying.

3. Expectations are so high on netflix that the slightest miss in earnings could cause a massive plunge as it is one of the more heavily shorted stocks around.

I think one way to play this is buying Jan 12 200/190 vertical put spreads. These costs around $500 and will return $500 if NFLX is below $190 come January 2012. If it keeps rallying you will lose the entire $500.