Wednesday Worries – NFLX Takes Traders on a Wild Ride
Is this the shape of things to come?
NFLX punshished the shorts in the morning but then proceeded to destroy anyone foolish enough to buy them over that $325 mark the rest of the day. I had mentioned, in the morning post, that NFLX was an example of how the market had become detached from reality – and this is what happens when reality reasserts itself.
We already had some large, short positions in the stock, most recently a March $350/305 bear put spread we had added to our Short-Term Portfolio in our Member Chat on Monday (as well as a still-bearish adjustment in our Long-Term Portfolio), ahead of earnings. As NFLX jumped SO high in the morning yesterday, we added 5 short Nov $400 calls at $11.50 ($5,750) in our Short-Term Portfolio and by the end of the day, NFLX had dropped so hard and fast that we simply bought back those calls for just $1.80 for a very nice $4,850 gain (84%) in 6 hours. At the close, we used our 5% Rule™ to determine:
The prior run was $240 to $320 (33%) but we'd really expect to see action at 40% ($336) and 50% ($360) and – well look at that – that's exactly what we got! $240 to $320 was a "real" move and we expect $16 and $32 pullbacks from there to $304 and $288. So, we know our NFLX supports on the way down should be $324 (short-term weak retrace), $318 (short-term strong retrace) and then, if $318 fails, we'd expect to see $304 (long-term weak retrace) and $288, which is where we'd probably look to go long for a bounce.
We already sold the 2015 $250 puts in our Long-Term Portfolio, putting a value floor on the stock there earlier in the week. In our Long-Term Portfolio, we had 40 short March $340 calls at $50.25, which finished the day at $30.25, up $80,000 (40%) in 2 days as part of a spread, so let's call $350 the top of our expected range for NFLX.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.