With just under two hours left on the clock Friday, erstwhile growth story Netflix (NFLX) has fabricated a volatile session which has caught the attention of option traders. Varied call and put activity is jumping aggressively above its 50SMA of about 11,700 contracts with volume of nearly 90,000 which puts the name atop the SP-500’s list of unusual volume for constituent stocks.
Shares of NFLX improved upon gains of about 20% on the week by a handful of points in today’s first half. Technical momentum tied to a recent blog post by its CEO that subscribers watched 1 billion hours of Netflix offerings in June and which also plugged new upcoming exclusive content, continued to draw in buyers before that villain known as profit-taking became the lead antagonist of bulls.
Figure 1: Netflix (NFLX) Daily EW4
Not a believer in fairytales or that all stories have a happy ending? Neither are we, nor is our technical pal PS Elliott which sees a potential Wave 4 setting up with the price spike in NFLX shares off its intermediate low of 60.70 set on June 1. We suspect the 26% short interest, which amounts to roughly 14.0 million shares as of mid-June, isn’t likely to keen on NFLX either. That said, it’s also not hard to think, or see for that matter, that with Thursday’s unusually large and near 15.0 million shares traded as NFLX broke cleanly above its 50SMA; the number of bears has dropped on forced short covering.
What’s a bear just maybe waking up to do? As an EBOT signal isn’t due to trigger unless shares trade below the 68 area and with earnings slated for July 24, traders up for residing in the bear camp may be considered early. But, a counter-trend, resistance style entry typically allows for improved risk-to-reward opportunities. In the case of NFLX, bearish traders using a technical-based, money stop loss could be looking at approximately 5 to 15 points of upside risk versus 20 to 40 points of downside profit potential based on a retest of recent lows and PS’ mid-TAPP near $40 by mid-August.
Of course, with NFLX options sporting both 2.5 and 5-point strike increments and overall decent liquidity provision, we’d look to use a strategy like the vertical to reduce both excessive stock risk and reducing any undesirable Greeks. Specifically or should I say, as specific as we’re willing to get without making a recommendation, either the August or September contract look to be a good place to start looking at trade ideas. Both months incorporate the TAPP zone and will be in play for the upcoming earnings report, which ideally could act as a bearish catalyst or at least provide enough time to adjust or exit prior to the event.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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