Wednesday Worries – NFLX Takes Traders on a Wild Ride

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. 

Our cover…