Here’s what we did on Netflix ($NFLX) – July 21, 2023
This is Dan Fitzpatrick with your Chart of the Day. Just a reminder that next week we’ve got the Fed meeting.
Wednesday we should hear what the oracles of finance are going to do this time around, my suspicion is, it’s 25 BP, and then news at 11. They have said they are not done. They are going to do more than 25, but let’s just get through each 25 basis point hike at a time and then we will see what the market does.
We have also got Microsoft ( NASDAQ: MSFT ) earnings on the 25th, as well as Google’s, or Alphabet ( NASDAQ: GOOGL ). So here’s what I want to do, I want to look at these real quick and this is why. When we were waiting for the Netflix ( NASDAQ: NFLX ) earnings, we’ll look at the daily chart. At Option Market Mentor I put on an iron condor in anticipation of a volatility event.
The idea was to sell, at that time, the $530.00 call and the $430.00 put that expire on Friday, today. And so I sold those and the idea was that the implied volatility is so high, and why? Well, because of earnings, and so the options are really expensive.
So I went far out of the money and looked at the option pricing to see where the probable maximum move on the stock would be. And then I sold calls and puts just outside of that anticipated range. And then I hedged it with a higher strike call and a lower strike put. But I was essentially short options at $530.00 and $430.00.
And so how did that play out? Well, it played out really well, and you will notice that the stock is closed here at 423.79. So it is over $6.00 below the strike where I sold, I must have lost my butt. Well, no, because we got out of that trade yesterday.
As soon as the stock opened up, down here, this trade, the $530.00 call, that went to zip really fast, so that’s done. So we are down here a little bit, still well above the strike. And those puts that we sold, the 430.00 puts, were less than what we sold them for. So we were still able to buy them back for a profit.
I was concerned that Netflix ( NASDAQ: NFLX ) was ultimately going to fall below 430.00. And so I really didn’t want to get greedy and say, Well, maybe it will close above 430.00. So we went ahead and bought those puts back, and it is a good thing we did. And so we are out of that trade now, we made a boatload of money on that.
Now, next week we may be able to do something similar with Microsoft ( NASDAQ: MSFT ) or Google ( NASDAQ: GOOGL ). Right now they are really kind of settled down and they are not really giving us much to look at. But the play that I just described is the type of trade that you want to be doing around earnings.
You don’t want to be betting about which way the stock is going to go. You want to be betting on how far it is going to go. And the Options Market can tell you what the probable move is going to be, and the Options Market is pretty darn smart. Because that is the wisdom of the crowd, not the madness of the crowd, that’s the wisdom of the crowd.
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