Volatility obviously can be bad as far as investors are concerned, but for option traders, it can be used to their advantage … with the right strategy.
Here is a trade idea on a stock that has been volatile the past few days and still can profit, even if the stock starts to trade sideways.
Netflix ($83.37) — Put Credit Spread
Netflix (NASDAQ:NFLX) certainly has had some volatile days over the last month or so. About a month ago, Carl Icahn announced that he had nearly a $500 million stake in the company, which sent shares higher. The stock slowly crawled higher through most of November until December arrived, and volatility returned.
The stock sold off Monday before it was announced Tuesday that Netflix entered into a multiyear pay-TV agreement with Disney (NYSE:DIS), prompting shares to jump over 8%. The agreement makes Netflix the exclusive subscription television service for first-run Disney Studios’ animated and live-action feature films in the U.S. In other words, this could be another big step to increasing the company’s net worth after the company fell out of favor with investors starting back in July 2011.
Click to Enlarge Looking at NFLX from a technical and options perspective, it might have some more momentum in it to continue to move higher. The only problem is that there is some minor resistance overhead around $90, which could keep the stock from temporarily moving higher.
One possible options strategy for this scenario is to sell a put credit spread.
The trade: Sell December 75/77.5 Put Credit Spread (selling the December 77.5 put and buying the December 75 put) for 50 cents or better.
The strategy: The maximum potential profit for this trade is 50 cents if NFLX is trading above $77.50 at December expiration. The maximum loss is $2 (2.50 – 0.50) if NFLX is trading below $75 at December expiration. Breakeven is $77 at expiration based on a $0.50 credit.
The rationale: The credit spread (depending on how it is implemented) can profit even if the stock trades sideways because the options would expire worthless and out-of-the-money. Even if NFLX decides to head lower, the 200-day simple moving average, which can act as support for the stock, is hanging right above the credit spread at around $78. It has taken well over a year for NFLX to get above its 200-day SMA, so it might have a hard time getting back below it again.
If the stock moves higher or the 200-day SMA acts as support before expiration, this credit spread will expire worthless and the premium is the trader’s to keep.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.