Though many equities are extending their losses today, not all companies are toeing the bearish line. Indeed, days like today make it easy to spot strength, the diamonds in the rough rallying amid broad bloodshed.
Netflix, Inc. (NASDAQ:NFLX
) lovers will be happy to know shares of the media company are standing strong. NFLX was up 1.5% in early morning trading.
While today’s strength is impressive, the price action in Netflix stock has been altogether uninspiring this year. It lost its mojo during January’s swan-dive and has yet to recover it.
Year-to-date NFLX is down 16%, despite a broader market that has been notching new all-time highs day after day.
If you’re looking for an end to the persistent relative weakness, keep an eye on the coming trendline test. If today’s strength isn’t a one-off, an upside breakout may be in store.
This year’s sideways churn has created a long-term symmetrical triangle. Its aimless wander is confirmed by a trio of moving averages that refuse to trend.
As shown in the accompanying Netflix stock chart, today’s pop has carried shares to the descending trendline. While the broad market weakness may deny the immediate breakout bid, an eventual breach seems likely.
The NFLX Breakout Trade
The 200-day moving average, currently perched at $101, is as logical a target as any for the breakout trade.
With Netflix earnings now a distant memory and the heat of summer upon us, option premiums have become cheap, dirt cheap. The implied volatility for NFLX options sits near the 52-week low and is unlikely to drop further.
If you think the stock makes a run for the century mark in the weeks ahead, consider buying the Oct $100/$105 bull call spread. The vertical spread consists of buying to open the Oct $100 call while selling to open the Oct $105 call.
The current cost of $1.75 represents the max risk in the trade and will be forfeited if Netflix stock is below $100 at expiration. The max reward is limited to the distance between strikes minus the initial debit, or $3.25, and will be captured if NFLX can rise above $105.
If you’re looking for confirmation of the breakout, wait for a breach of $98 before pulling the trigger.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
