Netflix (NFLX) About to Implode?

by Dan May 17, 2011 10:31 am • Commentary

Readers of this space know that while I am not a fan of NFLX‘s products or strategy (read previous post), I am not dumb enough to short the stock….

Technically looks like a classic head and shoulders top, with the left shoulder formed in early April, the head in late April, and the right shoulder formed a few days ago…..the neckline looks to be about 228 ( a few dollars a way).

[caption id="attachment_1886" align="aligncenter" width="300" caption="5 Month NFLX chart Provided by Bloomberg"][/caption]

I have a couple bearish trades that I have suggested (prior to Q1 earnings) that are still in play, but would like to roll out a bit as I think we are starting to see some chinks in the armor of the speculative Internet trade.

-If you are looking to play this technical breakdown, define your risk, Butterflies look attractive playing for a 5-8% move lower.   This is not a high conviction trade as I am not keying on anything other than sentiment and technicals, so if this is the sort of  trade that interests you use limits as the bid ask can be wide in names like this.  Also don’t pay too much for it, I like the almost 7.5 to 1 payout.

TRADE: NFLX (stock ~235.50)  BUY June 225/215/205 Put Fly for ~1.30

-Buy 1 Jun 225 Put for 6.60

-Sell 2 Jun 215 Puts for a total of 7.60 (3.80 each)

-Buy 1 Jun 205 Put for 2.30

Break-Even on June Expiration:

Upside: stock btwn 225 and 223.70 lose up to 1.30, stock above 225 lose all 1.30.

Downside: stock btwn 223.70 and 215 make up to 8.70, stock 215 make full 8.70, stock btwn 215 and 205 payout trails and 205 or below lose 1.30 premium you paid for the structure.