Next Decisions in NFLX
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Next Decisions in NFLX

Henry Gambell - March 8, 2016

Good evening everyone. This is Henry Gambell, with, and in today's free video, I wanted to spend some time talking about Netflix. This has obviously been one that John has been pretty into. It's had some pretty decent swings as of late, and with the 6% correction we saw today, I thought it might be worth taking another look at.

A couple of things I wanted to point out first, that will go along with the concept of what I want to talk about in today's free video, and the first part of that is that we are finally starting to see a little bit of a tick up in implied volatility. Now, this is pretty much what you would expect anytime you have a drop in a product, like what we saw today. but that spike in implied volatility tells me that I may have a chance to come in and work some type of spread, something where I'm selling these contracts that have now been kind of juiced up. That's part of what prompted the idea in this trade.

The other part, that didn't really prompt the idea as much, but just something to make note of as we get into this discussion, is that your Average True Range on this is about $5. Of course, we are looking at the daily chart, so this gives me one thing that will give me an idea of what to trade it around, as we sit here at 95, because, of course, knowing that we have a $5 ATR, knowing we're trading at 95, that puts 100 and 90 at pretty key levels. I think it's also very good, and I'm about to zoom in on this. but it's also worth pointing out that we had a squeeze that had fired long. Notice that this is the first drop in that move.

So what you've got is a squeeze that had fired to the buy side, which suggests a bullish tone, but then when it drops, and loses that momentum, maybe it's going to start trading sideways a bit more. So, I think the squeeze subscribes to a sideways market. The popping I.V. tells us there might be something to sell, and we also know what type of range to look at.

Now what we'll do is come in and hide these studies, and start working just on price. I feel that the only action you really need to analyze to get a good feel for what's going on with this, is the swing low, kind of up through in here. It doesn't have to be a perfect channel, and I'm not gonna spend any time running this symmetry, because this swing is too large. It's not really relevant to the current action that's going on. However, inside of this, we will have some smaller swings, so let's take this swing high to this swing low, reject it from Friday's high, and then just repeat this pattern. As we come in to here, this one was very close, and those are enough areas of symmetry that I can use to stand behind this analysis.

And then I would also add the retracement of the swing. You do all of this to try to give yourself a technical compliment to a fundamental idea. The fundamental part of this is looking at the option chain, looking at the range that we've been seeing off of the daily chart, etc., and when that's backed by what we see in the technicals, this starts to present a decent area of support. So what I'm thinking of here is, on this drop, of course, the 95 puts have been, you know, the greatest increase in implied volatility, so that's part of what I would like to sell. I know that I have a zone here around 95. That's what I would really like to see hold. If it does continue to drop, then I'm looking for my next support around 92/90, into 92/60.

So let's look at the option chain, and see what you might be able to set up around that. There's a few things that I'm going to look at in the premium video, but I would say the most common way to set this up, and I didn't see a whole lot of odd option activity that stood out to me, so don't bet the farm on this idea, but notice that the strongest contract you saw today was the volume on the 95 puts. I tend to lean towards the idea of those being sold to people chasing the downside, and there being more of a vested interest than in them expiring worthless.

That may not come to fruition. That's the least favorite part of this set-up, after the technicals I spoke to, but at least keep it in min. The most basic idea that I would look at here would be buying a butterfly, and then widening out the wings. Let's look at doing it. $5 wide, because that was the range that we got off of the ATR, not to mention it's also the move that was suggested into the end of the week, and if we price this out 5 wide, that will run you about $1.75 debit. So on something like that, you pay $1.75 for it. I'd like to pay closer to $1.33, but that's not too bad. Try to flip it a little bit later in the week, somewhere near $3, and ideally that is a good way to play the initial pop, and then hopefully a subsequent decline in that I.V., and price consolidating near 95.

I wanted to give you guys a couple of ideas around that. Show how I'll be playing it over the course of the next four days, and then I also want to make sure that you are aware of the webinar that John will be putting on tomorrow, Tuesday the 8th. The webinar will be getting started at 7 p.m. Central time. John is going to cover some of the most profitable strategies that he's been using in the current rather volatile environment. If you'd like to check that out, get a few more helpful free tips, we hope to see you there. Tuesday the 8th at 7 PM CST. You guys have a great night, and I'll see you at the next free video.