I don’t think anyone can be truly shocked that the market continues to move higher. Just look at a chart of the S&P 500 Index over the past year and you will see that almost every pullback has been bought.
Despite the bullish market, there are more than a few stocks that have outperformed the market. Many stocks have received upgrades from analysts. Take a look at Thursday for example.
Three relatively well-known stocks received upgrades raising their price targets: Broadcom Ltd, (NASDAQ:AVGO), McDonald’s Corporation (NYSE:MCD) and Netflix, Inc. (NASDAQ:NFLX). These three standout, but NFLX stock looks particularly good for a vertical credit spread.
Netflix stock gapped up on earnings in the middle of October 2016. After a retreat lasting until mid-December that year, NFLX stock has been climbing higher throughout 2017.
Taking a look at the chart below, for whatever reason, the $160 level has acted as some serious resistance for Netflix, not allowing the stock to close above that level and follow through to the next session. But on Thursday, NFLX stock gapped up after Piper Jaffray raised its target from $166 to $190.
If that wasn’t enough excitement, the streaming giant is set to release the next season of its wildly popular House of Cards, which might just add the the buying frenzy seen on Thursday.
Click to Enlarge Here is the conundrum for traders. Just last Wednesday the stock traded down to $153 and at the time of this writing it is trading above $163.
So is NFLX stock extended, though? Not sure, but many times after a stock has cleared a resistance level, it trades down and retests that level. Which is now considered potential support.
By selling a short-term vertical debit spread (in this case a bull put spread), an option trader can sustain a potential pullback with less money at risk than a stock position.
Nicolas Chahine wrote about selling a July put that he believes both traders and investors can implement to profit. This is a beautiful strategy but one that can take till July expiration to realize the maximum profit. This option strategy is more of a swing trade that can achieve maximum profit by next Friday’s expiration.
An Option Strategy to Consider on NFLX
The Trade: Sell the 2 June $160 put and buy the 2 June $157.50 put for a credit of 40 cents or more.
The Strategy: The maximum potential profit for this trade is 40 cents ($40 in real terms) if NFLX stock is trading at or above $160 at 2 June expiration. Both put options would expire worthless. The maximum loss is $2.10 ($210 in real terms). This would occur if NFLX is trading at or below $157.50 at 2 June expiration. Breakeven is $159.60 at expiration based on a credit of 40 cents.
Consider exiting the position ahead of expiration if the spread’s premium drops to a level less than it was purchased for or if the spread’s premium is above the sold premium.
Good luck!
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at john@markettaker.com. At the time of this writing, he did not own a position in any of the aforementioned securities.
