MorningWord 10/23/13: For those riding Carl Icahn’s coattails with his NFLX investment, yesterday’s outcome (selling half of his 9.4% stake for more than an $800 million gain), despite the 19% reversal from the all time highs made on the opening, was likely one of the best case scenarios for those who have been along for the ride. While Icahn has become fairly infamous for his “tape-bombs / Tweets” for his entry into long positions, it was not very likely that Icahn would apply the same treatment to his exits.
Think about it this way – if you had been long the stock from any point prior to last Wednesday, you are still up on the trade. I am sure there are some of the faithful who got in after Icahn’s original purchase back in January and find yesterday’s price action just noise, but make no mistake, there was some serious technical damage done, and the reversal could have been the mother of all blow off tops. My friend Josh Brown of the ReformedBroker blog did a very nice job describing a technical pattern called an engulfing candle in NFLX last night on Fast Money:
My quick take-away is that the positive news flow saw a fairly fierce crescendo into Monday night’s print. I am sure there were some savvy traders already lining up to short the opening gap before there were any rumblings of Icahn exiting part or all of his stake. As the day went on it became a sell fulfilling prophecy, and thus the relentless waves of selling, right into the closing bell.
So the billion dollar question is what to do with the stock. If you are long and think that the acceleration in earnings demonstrated so far in 2013 is likely to continue into 2014 as the company expands overseas, then set a fairly hard stop with the notion the stock could be down 10% in an overnight gap, and continue to ride the wave. If you are a trader and think that Icahn’s sale marks a watershed event for the stock, that he NAILED the all time lows, and might have NAILED the all time highs then the momentum shift could suggest a re-test of the Oct 9th lows of $283 (but it should first pause at its 50 day moving avg of ~$300) and then on the next piece of of bad news a decline to fairly attractive support at $250, the level in which it based before the most recent breakout.
The stock at current levels is a bit of an “Adult Swim”, and certainly a tough press on the short side – the stock at $300ish could be at a sort of equilibrium. While some may view Icahn’s sale as the lifting of a potential overhang, it is important to note that he still owns a 4.5% stake in the company equaling more than 2.5 million shares and now with his reduced holdings he does not have to disclose sales, and can piece out of the balance so to speak.
— Melissa Lee (@MelissaLeeCNBC) October 22, 2013
Implied volatility in the options got crushed after the print as expected, but shot up on the reversal mid day, setting up nicely for Calendars (selling short dated and buying longer dated) no matter what your directional inclination, or for those longs looking to add some yield and agree that yesterday’s highs could offer staunch near term resistance, then selling calls against your stock (strikes near yesterday’s highs) could be the right way to go in the very near term creating a mild buffer to the downside.