A lot of option traders will try to take advantage of time decay by selling short-term options. Many will sell “naked” options meaning there are no long or short positions to cover the sold options. Losses can be substantial with “naked” options if the stock moves adversely. Here is a short-term trade idea that can take advantage of time decay but in a relatively less risky manner.
Netflix Inc. (NFLX): Call Credit Spread
The trade: Sell the June 230/235 Call Credit Spread (selling the June 230 call and buying the June 235 call) for 45 cents or better.
The strategy: The maximum potential profit for this trade is 45 cents if NFLX is trading below $230 at April expiration. Both call options would expire worthless. The maximum loss is $4.55 ($5 – 45 cents) if NFLX is trading above $235 at April expiration. Breakeven is $230.45 at expiration based on a cost of 45 cents.
Click to EnlargeThe rationale: Netflix is not new to volatile swings. The stock has had quite a few runs higher and lower over the last several years. Currently the stock has been sliding lower until a bullish day in the market on Thursday broke the trend lower. The question becomes how long will this reversal last? A trader can breakdown the fundamentals of the company but really this trade comes down to how it will perform for just over a week which is June expiration.
Taking a look at the stock’s performance over the last ten days, NFLX has slid from around $229 to below $208 in that time until this recent rally. The stock has a minor resistance level (prior pivots) right around $218 which could keep the stock from moving higher if it tries to continue to rebound. Knowing that the stock has not been above $230 in the last ten days, the market has not looked particularly strong lately and that it has just over a week until expiration makes this trade idea look like a potential movie star.