Our neutral-to-negative flow remains the backdrop as we walk through the summer. So, digging a bit deeper into the issue of systemic risk within a segment, let's consider a fresh options trade in Netflix. This column highlights a put butterfly spread trade in Netflix stock.
Volatility continues to increase in the market. This does not necessarily mean more downward flow, but range expansion in prices does create excellent revenue generation in the options market.
Netflix Stock Today
Netflix, the ubiquitous streaming platform, continues to find competition at every turn from the likes of Amazon, Paramount and Walt Disney, to name a few.
Add to this the Screen Actors Guild strike set to reduce U.S. driven content and delivery to its platform — without the resolution of one of the rather sticky issues within the strike: how AI is shifting the costs within the industry itself as production companies wallow in debt.
Remember that the stock market is a forward-pricing mechanism. Market participants have been discounting Netflix stock since its pandemic high of $700.
Netflix is also facing increased competition. So the choice here is to find a bearish positioning that allows for gains under the drift lower over the coming months before the chart stabilizes for its next turn upward.
On IBD Stock Checkup, Netflix stock stands strong as 2nd in the list of internet driven subscription services, so it appears strong to have a negative position here. Consider sizing as an important event in your decision making.
Setting Up The Butterfly Put Spread
Inside the option toolbox, the long calendar spread wheel is a neutral to bullish position and estimates that near-term prices are within a range but will rise over the longer term.
Here's how we set up the long put butterfly in Netflix stock now:
- Buy to open 1 NFLX Oct. 20-expiration put option at the 370 strike price
- Sell to open 2 NFLX Oct. 20 350 puts
- Buy to open 1 NFLX Oct. 20 330 put
Total debit of $1.58, based on Netflix stock's recent price, leads to a break-even cost for Netflix stock at 368.42. Calculate this by taking the price of the option spread minus the strike of the option.
The goal? Allow Netflix stock to move to 350 and close the spread as the debit price will triple in price. The maximum profit potential could get reached as well. In the case of this trade, calculate maximum profit of 18.42, or $1,842 per set of contracts, by taking the difference between the high and middle strike puts (20), and subtract the debit (1.58).
Defending The Trade
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
Buying a long put butterfly spread surmises price action will continue to fade into the coming months. But the use of sold options further out of the money will make for an excellent risk-on return.
The weekly resistance zone was created with the failure of NFLX to recapture the open of last month. Now, traders are likely to test that last breakout level near 379. If sellers become nervous and begin to compete to sell Netflix stock, there is quite a heavy congestion zone at 350. This thereby defines the decision for where the strikes have been chosen.
Key Chart Levels
Consider these scenarios for the trade:
- Netflix stock grinds higher. We breach and hold the 425 level for more than 3 days and leave the trade.
- Stock grinds higher and it hits our personal risk threshold; we exit the trade.
- Shares grind lower but do not break 370 with one week to go into expiration. We exit the trade with minimal gains.
- NFLX grinds lower but does not break 350 with one week to go into expiration and we exit the trade with close to maximum gains.
- Netflix stock grinds lower and breaks 350 with one week to go into expiration and our maximum profits begin to erode and we exit the trade.
As with all trades, consider what you like about holding the stock in the first place and consider your risk carefully. Plus, be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
