New Trade $NFLX – We’ve Seen This Movie Before

by Enis September 12, 2013 10:15 am • Commentary

Dan discussed the backdrop for NFLX in his Morning Word.  I’m actually quite an optimist on the long-term outlook for online video, as I detailed in my Macro Wrap last month.  And NFLX is at the center of that shift.

But as is the case with AMZN, NFLX has a great platform that is extremely difficult to value.  So psychology generally trumps the fundamentals for any reasonable trading time frame.  In that sense, I see some warning signs.  

The stock traded above $300 for the second time in its history this week.  In fact, it made a new all-time high on Tuesday’s breakout above the 2011 high.  However, today’s break lower is significant for several reasons.

First, the stock is now at risk of a false breakout above $305, indicating a potential bull trap (circled in green) in this week’s price action:

[caption id="attachment_30193" align="alignnone" width="600"]Daily chart of NFLX, Courtesy of Bloomberg Daily chart of NFLX, Courtesy of Bloomberg[/caption]

From failed moves often come fast moves.

Second, the stock has pushed higher over the past 5 months on lower and lower momentum readings, and lower and lower volume readings:

[caption id="attachment_30194" align="alignnone" width="600"]Daily chart of NFLX, with volume panel, and RSI panel, Courtesy of Bloomberg Daily chart of NFLX, with volume panel, and RSI panel, Courtesy of Bloomberg[/caption]

Finally, the short interest in NFLX is near 5 year lows, a clear indication of a wash-out of the bears (and likely even lower after Tuesday’s breakout):

[caption id="attachment_30195" align="alignnone" width="600"]NFLX Short Interest, Courtesy of Bloomberg NFLX Short Interest, Courtesy of Bloomberg[/caption]

With all of that in mind, the timing seems better than normal for fading this momentum high flier with a low premium downside structure:

TRADE: NFLX ($302.75) Bought Oct18th 280/255/230 Put Fly for $3.00

-Bought 1 Oct18th 280 Put for 6.85

-Sold 2 Oct18th 255 Puts at 2.30 each or 4.60 total

-Bought 1 Oct18th 230 Put for 0.75

Break-Even on Oct18th Expiration:

Profits: btwn 277 and 233 make up to 22, max gain of 22 at 255.

Losses: up to 3.00 btwn 277 and 280, and btwn 233 and 230, with max loss of 3.00 below 230 and above 280.

Trade Rationale:  The 235 to 275 area saw a lot of price action earlier this year, and captures both the rising 50 day and 100 day moving averages as well.  We would be quick on the trigger to exit this trade on the first meaningful pullback in the stock.