The stench of disappointing earnings has yet to fully dissipate in Netflix, Inc. (NFLX), as continued angst keeps a lid on any and all recovery attempts cropping up since April’s mega drop.
It’s latest ascension bid was cut short yesterday when broad tech-sector selling dragged NFLX lower in the process.
Netflix watchers waiting for the smoke to clear before trading ought to take note: An interesting, indeed actionable, setup is creating a prime opportunity for bulls and bears alike. Let’s dig in.
First, the trend for Netflix is a hot mess, and is now officially pointing lower on all time frames. Take note of how all moving averages are descending in the chart below.
Click to Enlarge
While such positioning doesn’t guarantee imminent doom, it’s sure as heck not bullish.
Negative surprises multiply when stocks enter bear country. And NFLX finds itself dead center of the bears’ domain.
Not that it’s license to plow into the ailing entertainment stock with guns ablazin’. Prudence dictates waiting for a low-risk entry. But don’t worry, that itch in your trigger finger is about to be sated, as a sweet bear setup in Netflix stock has materialized.
A trading range has taken root between $87.50 and $92.50. If you’re bullish, you must wait for a break above $92.50 before piling in. Otherwise your buy is mere wishful thinking. If you’re bearish, consider playing the coming breakdown below the $87.50 level. A breach of that floor would signal the $80 zone as Netflix’s next destination.
Your NFLX Stock Options Trade
Buy the July $85 puts for $5.06 to profit from the coming breakdown. The max loss is limited to the initial $5.06 debit and will be forfeited if the NFLX stock price sits above $85 at expiration. Although, you can minimize the risk by exiting if Netflix rises above the $92.50 resistance level.
The reward is limited only by NFLX reaching zero. Which means you’ll continue racking up gains as long as NFLX keeps falling. If the stock does fall to $80 in the coming weeks, consider taking profits off the table.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
