In this week’s NetPicks Options Trade of the Week we will go back to Netflix (Symbol: NFLX).
NFLX has been on an impressive run to the upside so far this year. Even with the overall market selling off back in February, NFLX has stayed strong up near it’s all time highs.
It made a new high again today around the $327 level which leaves it at a very overbought condition. As a result, I’m looking to place a trade that will benefit from a period of consolidation or even a pullback in the coming weeks.
Netflix Options Trade Setup
Looking at the Daily Chart of NFLX, you can see that we are approaching 2 Standard Deviation channel. When we see this type of an extreme it can often times lead to that market slowing down or reversing.
Trading options gives us a many ways to profit from a market and in this case, I’m looking to sell a call spread.
- We will sell the 23March18 335/337.5 call spread.
- This has us going out to the weekly options expiring on March 23.
- These have 14 days left to expiration.
- We will be selling the 335 call and at the same time buying the 337.5 call.
You can see and hear this trade setup in this NFLX Options Video
Profit: This trade will allow us to collect $.85 or $85 per spread, which is also the most we can make on the trade.
Risk: We are risking $165 per spread which makes this a very reasonable trade for many account sizes. Especially given NFLX is a $325 stock.
Since we are collecting $.85 per spread, our breakeven point will be at $335.85. This is found by taking the $335 strike of the call we are selling and adding in the $.85 we are collecting to sell the spread. NFLX can move higher, lower, or sideways.
- We make money as long as price stays below $335.85.
- We also make money from time decay adding up and from volatility decreasing.
This gives us 5 different ways of making money on the trade.
With the IV percentile at 86, this means the implied volatility being used to price the options is up near 52 week highs.
If this number moves back down towards the 50th percentile, which we know it will over time, we make money from the options getting cheaper due to the lower implied volatility.
If we want a bearish trade why don’t we buy a put option?
The problem with buying a put option at these levels is we would only have one way of making money. NFLX would have to move lower immediately or we would lose money from the time decay. Not to mention just because we are overbought doesn’t mean it has to immediately reverse.
We could very well enter a period of sideways chop.
Since we are selling a call spread, we are increasing our odds of success. As we mentioned earlier, we now have 5 ways of making money on the short call spread. We give up the bigger profit potential that we would have by buying the long put but in exchange we are getting a higher probability of making money with the spread.
With the 335 call option having a 66% chance of closing out of the money this gives us just over a 66% chance of making money on this trade. The nice part about this position is that we can put it on with $165 of capital per spread. This is also the most we can lose on the trade.
Even if we are dead wrong, we are losing less than $200.
The ideal scenario is for NFLX to move lower into next week. We can work with a sideways chop as well. Let’s see if we finally get a pullback from the overbought extreme that we are seeing so we can book some profit on this trade.
Trade Of The Week Open Trades Update:
Over the past few weeks, we have put on a few different options trades for our Trade of the Week. We currently are still holding 2 of them.
Let’s review where those trades stand as of the close this week.
We sold the FB March monthly 185/190 call spread for $1.43 two weeks ago. With Facebook approaching $185 here this week, we are now approaching our breakeven point. We are ok as long as Facebook stays below $186.43. Going into next week we need a move lower. If we get that move we will look to book a partial profit. I’m still looking to buy this one back between $.35-$.70. We will continue to hold this one into next week.
Last week we sold the HAL March monthly 47/48/44/43 Iron Condor for $.45. We need HAL to stay between $47.45 and $43.55. Currently we are ok on this trade with HAL trading around the $47 level. Ideally, we are looking for a pullback from current levels going into next week. If we get a $.50-$1.00 pullback in the price of HAL stock, we will be able to book a quick profit.
We are looking to close this trade out for between $.11-$.22. We will continue to hold this one into next week.