Netflix (NASDAQ: NFLX) has certainly had a bad few weeks. Since closing at $418.65 on July 11, NFLX stock has crashed 20% over the past 13 trading sessions. The former momentum stock stalwart and FANG member is now firmly in bear market territory. While some of the drop is undoubtedly warranted, the selling is starting to get overdone. Look for Netflix to find support near current levels over the coming months.
The first leg down in NFLX stock was due to a less-than-stellar earnings report that pointed to slowing subscriber growth and ongoing cash burn issues. Yesterday’s bloodbath can be attributed to news that Walmart (NYSE:WMT) is looking to develop a video streaming service to rival Netflix and Amazon (NASDAQ:AMZN).
Certainly the earnings-based reaction can be justified given the weak report. The reaction on the heels of the WMT news, however, smacks of panic selling — especially given that the proposed Walmart service is still in the planning stages and needs to pass due diligence to get greenlit.
Click to Enlarge From a technical standpoint, NFLX stock is getting extremely oversold. The 9-day RSI is at by far the lowest level in the past year, with a reading approaching 20. Previous instances when Netflix was even close to this oversold proved to mark significant lows in the stock. NFLX stock also is back at the 50-day moving average, a level which has been a springboard for a rally in the past.
MACD is also at the most extreme levels over the past 12 months, another sign that the selling may be getting overdone.
In my previous analysis on NFLX stock from June 18, I had a decidedly bearish outlook on Netflix at the $400 level. Now that the stock has come crashing back to reality, my bearish viewpoint has tempered greatly — because price does matter.
The recent carnage in Netflix has caused implied volatility (IV) to spike, meaning option prices are comparatively more expensive. So to position to be a buyer of NFLX stock at even lower levels, a put credit spread makes probabilistic sense.
NFLX Stock Trade Idea
Buy the NFLX Sep $295 put and sell the NFLX Sep $300 put for an 80-cent net credit.
Maximum gain on the trade is $80 per spread with maximum risk of $420 per spread. Return on risk is 19%. The short $300 strike price provides a 10.4% downside cushion to the $334.96 closing price of NFLX stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.
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