Netflix, which is where I spend most of my evenings, suffered a large decline in its share price after its second-quarter earnings announcement. Revenue missed while Earnings per Share exceeded estimates.
The overriding issue that took down the price had to do with missing subscriber additions and the threat of additional competition from Fox, Disney and other content providers and creators. Not only that but if your household is anything like mine, I’m paying for five different people to have access to my Netflix account, (which fits in their terms of service) and you may know several other households doing the same.
On June 29, I wrote an article on two high-probability trade ideas in Netflix going into earnings. Each of these trades had a probability of profit of 70 percent and as of July 18, both would have been profitable with three days until expiration.
For those who were bearish on NFLX, they must have been overjoyed that the “House of Cards” was finally tumbling down after the stock had been up more 100 percent in the first half of the year. The setup was to sell a July 435 Call and buy a 440 Call for $117 in credit, leaving a max risk of $383, or less than one share of NFLX. This trade worked so well it is currently worthless, meaning a full winner to the option seller.
But those who were bullish on NFLX, thinking the trend was their friend, probably were a bit worried when they went to bed after seeing the earnings impact. However, as the day went on, NFLX went up. From a low of $344.00 to end the day at $379.48, down just 5.24 percent from the prior close and with more than five times the average volume, somebody was eagerly buying the dip.
The bullish trade setup was to sell a July 372.5 Put and buy a 370 Put. This trade would have begun the day as a potential full loser, but as of the close on July 17, it was out of the money. Now with just a few days to go, it’s possible it may expire worthless, also being a full winner.
Both of these trades sold a 30 Delta option. By using the 30 Delta, each setup has a 70 percent probability of profit. So we know before even clicking the submit order button that we have a great trade on our hands, regardless of any moving averages, signals, fundamentals or technical indicators. It’s key to not be emotional, but rather to let the probabilities play out as the Put Spread would have gone from a full loser to a full winner within one trading session.
By trading options, you are giving yourself one of the greatest advantages you can have when trading stocks, putting the probabilities in your favor. Now it’s true that it doesn’t always work out this well, but this is a great example of how by using the resources already in your broker’s trading platform, you can be an even better trader.
Christopher M. Uhl, CMA, MOSM