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Credit Spread – Netflix Inc. (NFLX)

Since markets are closed Monday, this NFLX options spread is likely to expire worthless


Memorial Day is right around the corner and besides unofficially kicking off summer; it is day without trading in the U.S. markets. Here is a trade idea that can possibly take advantage of a little time off.

5-23-13-NFLXchartNetflix Inc. (NFLX): Call Credit Spread

The trade: Sell the May 31 $240/$245 Call Credit Spread (selling the May 31 $240 call and buying the May-31-13 245 call) for 0.45 or better.

The strategy: The maximum potential profit for this trade is 45 cents  if NFLX is trading below $240 at May-31-13 expiration. Both call options would expire worthless. The maximum loss is $4.55 ($5 – 45 cents) if NFLX is trading above $245 at May-31-13 expiration.  Breakeven is $240.45 at expiration based on a credit of 45 cents.

The rationale: This trade idea boils down to two simple concepts in options trading; time and resistance. Netflix has had quite the run higher after it announced earnings last month. In fact I was looking for the stock to break above a two year resistance area (prior pivot) around $240 for a bullish entry which never came. That area of resistance kept the stock from moving higher and with this current market sell-off, the stock fell to a $220 support level. Does the stock have enough in it to make it back up and challenge that area again?

It just may but with just over a week to go until expiration, a holiday thrown in where trading is dark and a current unsettled market, it may have a tough time getting there. Of course there is a chance that the support area caves in and actually moves the stock lower which would help this spread. We for sure don’t know what is going to happen in the future, but the odds of this credit spread expiring worthless look potentially pretty good for just over a week.

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