Netflix (NFLX): An Options Strategy For Bearish Traders

Netflix (NFLX) stock has had a mammoth run up since early April moving from $420 to just over $700 in under 3 months. That’s an astonishing 68% return. Fantastic if you were able to take advantage of it.

However, over the last 3 trading days, the stock has sold off on heavy volume and it makes sense that the stock would pause here or even have a mild pullback.

The 50 day moving average is currently around the $610 level and the $700 level seems to be providing strong resistance in the short term.

Potential 30% Return in 11 Days for Bearish Options Traders

One trading opportunity for those traders who think NFLX will not move much higher from here is a Bear Call Spread.

If a trader believed the recent high of $700 will hold, they could use the $710 strike as the short call and the $715 strike as the long call. Using $710 as the short call gives you a little more wiggle room than just using $700.

Currently, this trade offers a roughly 30% return on risk over the next 11 trading days when using the July 17th expiry.

The maximum profit on the trade would be $115 per contract with a maximum risk of $385. The spread would achieve the maximum 30% profit if NFLX closes below $710 on July 17th in which case the entire spread would expire worthless allowing the premium seller to keep the $115 option premium.

The maximum loss would occur if NFLX closes above $715 on July 17th which would see the premium seller lose $385 on the trade. The breakeven point for the bear call Spread is $711.15 which is calculated as $710 plus the $1.15 option premium per contract. Keep in mind that due to the bid-ask spread, you may not be able to get filled at these prices.

The breakeven price is 9.10% above the current stock price.

Looking at the NFLX stock chart, we can see that it’s been very extended for some time and looks to be taking a breather. The Relative Strength Index (RSI) has been overbought since mid-April and is now heading downwards.

The stock has not tested the 50 day moving average since early April.

Netflix (NFLX) Stock Chart

netflix nflx stock chart oversold june 29 2015

It takes a brave man to bet against a strong stock like Netflix (NFLX), but any traders who think the move has been overdone can do well trading bear call spreads. A $710 – $715 bear call spread can offer a decent return for traders willing to bet the stock will stay below $710.

 

Twitter:  @OptiontradinIQ

No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

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