Netflix has been the #1 momo stock for the past few years. Recently, its ascent began to accelerate at an unsustainable pace. When a stock begins to behave like this it is time to look for low risk high reward entries on the short side.
Here are a few things you can look for as clues when to open the short position:
- Stock has failed several times to make a new closing high after a recent large run up
- A series of new significantly higher price targets that don’t cause the stock to move higher
- Deteriorating market conditions
In the case of NFLX we had all 3 of the above in the past week or so. Here are some tweets I shared about NFLX.
So that is in fact what I did. I bought NFLX 120 puts expiring August 21st. I paid around 50 cents. I shared this idea on StockTwits and discussed the idea in more detail on SMB Real Time (audio feed on our desk). From my perspective it was an extremely low risk way to play a potential sell off. The price action I was looking for to confirm the downside move was it trading below 119. NFLX has been so strong the past few weeks I felt there wouldn’t be too much nervousness until it began to trade in the teens. As it was getting close to my trigger this morning I tweeted this.
As it got to my target area around 114-115 I scaled out of the puts and tweeted this.
Things I could have done better in the trade: When it traded below 119 I could have added stock to the position as I was in the money and it was worth pressing. Also, when it bounced back to 115 I could have shorted some with a tight stop as this had been morning support and could become afternoon resistance. I could maximized profits on the initial position by being a little more patient with the final 1/3 of my position. I had tweeted a couple of weeks ago that Netflix was much more volatile intraday since it did its 7/1 stock split. Looking at the daily chart you can see the five largest intraday moves in the past year have occurred in the month following the split. Today it dropped the equivalent of $70 pre-split, which is the kind of move you previously only saw following an earnings report.
Steven Spencer is the co-founder of SMB Capital and SMB University which provides trading education in stocks, and options. He has traded professionally for 19 years. His email address is: [email protected].
Steven Spencer is currently long NFLX puts and stock (effectively net short)
