In an uncharacteristic bout of strength, buyers showed up en masse on Friday. The down-gap in equities was snatched up aggressively in stocks across the board.
The one silver lining of a market correction is it quickly reveals which uptrends have staying power and which were built on a house of cards.
Count Netflix (NFLX) among the former. NFLX stock has held up relatively well since the August plunge and is poised for a clean breakout that could send the media darling back to its previous heights, particularly if the broader market can find its footing.
One promising development for NFLX over the past two months has been the series of higher pivot lows that has developed. These ascending stairs reveal an underlying bid that is becoming increasingly aggressive on each and every dip.
Thus far, overhead resistance has stymied each rebound attempt but I suspect the time for a successful breach is finally at hand. A break above the $107 and especially the 50-day moving average could kick off NFLX stock’s next advance.
Click to Enlarge
To illustrate the ongoing relative strength in NFLX take a gander at the comparative relative strength study shown in the lower panel of the accompanying chart. Though Netflix suffered a bout of underperformance in early September it has since righted the ship. The uptrend in its relative strength line is back on track.
Embrace the Odds with NFLX Bull Put Spreads
While a sharp upturn and rapid return to the $125 level would be the ideal outcome for the coming NFLX stock breakout and necessitates an aggressive trade idea, I’m going to err on the side of caution here. Sacrificing some upside in exchange for enhancing our probability of profit seems a fair trade given the S&P 500 is still floundering.
With Netflix earnings fast approaching, option premiums are experiencing their quarterly per-earnings ramp. In other words, option buyers are really having to pay up here while option sellers are receiving more compensation for the additional risk. If you think the coming breakout sticks and are willing to head into earnings with a bullish bias, consider selling the Nov $85/$80 bull put spread for $1 credit.
The max reward is limited to the initial $1 credit and will be pocketed if NFLX stock price sits above $85 at November expiration. The max risk is limited to the distance between strikes minus the net credit, or $4, and will be lost if NFLX sits below $80 at expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
