September 6, 2018

Netflix Could Be A Late Summer Bomb

“If the U.S., regardless of opposition, adopts any new tariff measures, China will be forced to roll out necessary retaliatory measures,” according to the country’s commerce ministry. Due to China’s massive trade surplus over the U.S., many expect the nation could further devalue its currency or crack down on U.S. firms inside the country. The Trump administration is reportedly ready to move ahead with a next round of tariffs after a public comment period ends at midnight.

American and Canadian negotiators are engaged in “intense” NAFTA discussions, according to President Trump. “If it doesn’t work out, it’ll be fine for our country but it won’t be OK for Canada,” he added. Talks broke down last Friday after the two sides failed to reach a deal that would bring Canada into a new trilateral trade pact with the U.S. and Mexico.

*Source:  Seeking Alpha

Let’s consider Netflix (Ticker: NFLX):

The VantagePoint platform recently indicated downside momentum.

Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out three significant things. We have a bearish crossover indicated by the blue predictive indicator line crossing below the black simple moving average on September 5th.  We can combine that with the VantagePoint propriety neural index indicator moving from the Green to the RED on August 31st.  This indicator measures strength and weakness for a 48-hour period, in this case weakness.  The move to the RED position further makes the case for a potential bearish scenario. We also have the predicted high and low below yesterday’s actual high and low indicating further weakness.  I want to play the VP continued bearish indication.

Strategy Discussion

If you are strictly a stock trader, simply selling NFLX in the $346.00 area is a prudent move.  You are anticipating a move to the downside.  It is always a good idea to enter a buy-stop order to mitigate potential losses.  Placing that buy-stop in the $360.00 area will achieve that goal.

For active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.

Because of the reasons given above, the purchase of a debit put spread may be one way to approach this situation.  You will first want to calculate your target strike.  In order to do this, you will need three pieces of data:  current price, expiration date and the implied volatility associated with that expiration date.  For NFLX, that yields a target strike of ~$320.00.  You may want to consider the NFLX September 21st regular monthly expiration 320/325 put spread, buying it for $1.05.  The most you can lose is the premium paid and the most you can gain is the width of the spread less any premium paid.  Max risk = $1.05 and max reward = $3.95

This means that you are getting odds of 3.76:1.

Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.

Position Update

Today we will have a lesson in position management.  You may recall that back on August 28th we entered a debit put spread in Fastenal (Ticker:  FAST).  We purchased the September 21st regular monthly expiration 55/57.5 put spread for $0.55.  Here is today’s chart:

You can see that although FAST did move down, it was not enough to hold the premium in our put spread.  Please notice a few things.  We had a short term bullish crossover along with the medium term predictive difference positively sloped.  The long term predictive difference was flattening out.  The Neural Index has gone GREEN and the predicted range is no longer bearish.  For these reasons we exited our put spread for a minor loss of $0.35.  That is an ROI of -30.00%.  Better to cut losses and move on to better opportunities.

If you would like to learn more about the VantagePoint platform and take advantage of the exclusive offer that our clients enjoy, please visit:

https://discover.vantagepointsoftware.com/prosper-demo/

about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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