The flow of profits has continued for Netflix, Inc. (NASDAQ:NFLX) following last week’s all-star earnings announcement. All told, NFLX stock has added $27, or 17%, to its share price since the day before the report. And with all previous resistance levels now left in the dust, there’s nothing standing in its way.
Indeed, with Netflix notching a new closing high Wednesday, it boasts bullish technical signals across the board. The uptrend is a thing of beauty. Its momentum soared on the earnings gap. And the Relative Strength Index (RSI) is off the charts.
NFLX Stock Chart
The only thing that should be concerning Netflix fanboys is the stock’s stretched status.
It’s extended, no doubt about it. And that’s making it difficult to chase here. Normally we’d lie in wait for a nice little three- to five-day retracement before deploying bullish trades. And while a pullback may still strike, so far sellers haven’t been able to gain any traction at all.
And it’s not as if fading Netflix up here is a layup either. It’s overbought, yes, but the post-earnings run has been gradual enough to make it unlikely this is a blow-off top. The easiest fades are those that arise following a parabolic ascent, and NFLX stock doesn’t really qualify here.
Since the stock is perched at all-time highs, there aren’t any resistance levels to key in on. But, on the support side, I do suggest watching a couple of price thresholds in the days ahead. The unfilled gap at $175 could become a floor when tested.
And then there’s the rising 20-day moving average near $165, which could provide support. That fact that a retreat to $165 would fill the earnings gap increases its significance and makes it all the more likely that buyers step up.
Throw it all together, and I wouldn’t mind getting long Netflix near $165 or short if it stretches further to $210 or so.
In situations like this — where I want to be a buyer at lower prices, but a seller at higher prices — the iron condor strategy is my weapon of choice.
Greek Speak
Allow me to geek out for a second before we get to the trade. It’ll be good for you.
The iron condor starts out as a neutral strategy. In terms of the options greeks, we say it is a delta-neutral trade. But it doesn’t stay neutral. Embedded in the position is something called negative gamma, which essentially gets you shorter as the stock rises, but longer as it falls.
And that is a perfect fit for our outlook in Netflix here.
I don’t mind getting shorter if it climbs further from here because I think it will eventually drop due to profit-taking. Whether sellers strike at $190 or $200 or $210 remains to be seen, but I’m willing to bet they will, in fact, strike.
On the flipside, since the uptrend in NFLX is so strong and because there is so much potential support at $175 and $165, I don’t mind getting longer if the price falls from here, because I think any dip toward either level will be bought up.
How to Trade NFLX Stock
Here’s the trade: Sell the Sep $210/$215 bear call and the Sep $165/$160 bull put for a total net credit of $1.00. Consider it a bet that NFLX remains between $210 and $165 for the next 50 days. If it does all the options will expire worthless allowing you to pocket the initial $1 of premium.
The risk of the position is limited to $4 and will be forfeited if Netflix stock either falls below $160 or rises above $215. To minimize the damage, I suggest exiting the bear call if we hit $210 or the bull put if we hit $165.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
