The “bubblicious” behavior in Netflix, Inc. (NASDAQ:NFLX) has finally met its match. At least in the short run. Shareholders are swelling with profits and finally decided to ring the register. And who can blame them? At its peak earlier this week, NFLX stock had climbed 49% in January alone! To say that the ascent is unsustainable is the understatement of the century.
The profit-taking has delivered a shallow two-day pullback thus far, and more down days could be around the corner. Now, that certainly wouldn’t be a bad thing. Quite the contrary, spectators should be celebrating this price retreat because it’s returning NFLX to support levels creating a lower-risk entry for new trades. In sizing up the next potential floors, two price thresholds standout: $250 and $237.50.
January’s monster earnings induced pole-vault left a substantial price gap in its wake. These gaps tend to turn into support once retested from the topside. That’s where $250 comes into play. And if sellers really press their advantage and attempt a gap fill, the 20-day moving average at $237.50 is the next potential stop.
Obviously, you can wait for confirmation that buyers are emerging at either level before deploying bullish trades. But, regardless of how far we retreat this dip is undoubtedly a buy. The uptrend in NFLX is too strong to bet against at this point.
Sizing Up a NFLX Stock Option Trade
Typically option premiums rapidly shrink post-earnings, but due to Netflix’s meteoric ascent implied volatility remains lofty. And that suggests short premium plays are the way to go here. I like the idea of scaling into a bull put spread.
With 42 days to expiration, March options provide a modest rate of time decay while keeping our window of exposure small. If you’re willing to bet Netflix stock can stay above $230 for the next few weeks, then sell the March $230/$225 bull put spread for 50 cents. The nice thing about the $230 zone is it is the gap fill area for the stock’s earnings jump. It, therefore, has a strong chance of providing support if NFLX gets “squirrely” and drops to that level.
The initial 50 cent premium represents the max reward, and the max risk is $4.50. You could further increase your odds of success by scaling in. That is, sell a partial position now for 50 cents, but look to add more if NFLX drops further and the spread value rises to 75 cents or $1.00.
As of this writing, Tyler Craig held neutral options positions in NFLX. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
