Here’s how I’m trading Netflix ($NFLX) tomorrow. It’s all about the implied move. (July 16, 2020)
NFLX
What are we going to do with Netflix ( NASDAQ: NFLX ) tomorrow? Here’s the thing: The company reported earnings that obviously the market didn’t like. I think they gave kind of tepid guidance on their new subscribers revenue. Basically, things are fine but they’re not that fine; that kind of thing, which is kind of weird when you think about it because this is a media company. Supposedly everybody is sitting at home on their “asterisk” and watching TV, so what’s up?
Well, this has been going on for a while and after this dip here Netflix ( NASDAQ: NFLX ), at one point, was up 90 percent. That’s pretty good, that’s a pretty good move. Even coming out of this congestion here the stock is up 25 percent, so it’s been kind of ripe for a rest anyway.
If you look at how the stock traded after hours, it tanked really big here. It hit 460.00 but actually, if you really look at the bottom the low was 449.65; we’ll say that’s 450.00, that’s right at the 50-day moving average. Right at the 50-day moving average, which has been a really good time to be buying the stock; four different times these pullbacks to the 50 have worked. You could see once the stock drifted up above it, again, you have the 50-day moving average holding as support. So it’s really not surprising that the stock rebounded off of the 50 after hours.
Now, what it does tomorrow we don’t really know. However, we do have an idea. You see this line here at 483.39; I just kind of rounded numbers it’s not a precise thing, but I used an implied move here. What an implied move is, you look at the option market for the shortest duration options and that would be those that reporting tomorrow. And you look at, what would it cost me to set up a straddle? Meaning this is where the stock is trading. So we will pick 525.00 because there is no such thing as a 527.39 option but we will say 525.00.
So how much does the July 17th, 525.00, and you can use 530.00 if you want it’s kind of 6 of one, half a dozen of another, but how much does the 525.00 call AND the 520.00 put cost? How much does that cost? You add those together and that is basically the implied move. That’s the move that the options market is thinking that the stock is going to move.
Now, it’s not that the stock is going to move after earnings but rather, where is the stock going to be when these options expire? And so on the downside, we don’t care about the upside, on the downside that implied move was $44.00. And so what happened with the stock? This would be $44.00, give or take, from where the stock closed right here. So then what happened? Boom, after hours the stock traded well below this.
Well, one way to trade on these options implied moves is this, if a stock moves outside, if the implied move is supposed to be right here, again, it’s where is the stock going to be when the option expires, and that’s tomorrow at the close, right? If that is where the maximum excursion is then if the stock is down here at 476.00 it’s a buy tomorrow morning. You have to expect it to come back up within the outer limit, that’s just the way it is. The options market, particularly on these big liquid stocks, the options market is really smart. And it will also tell you where people are situated, where their positions are.
I think the reason this was such a great buy down here at the 50 is because it was WAY below, like 7 percent below where the maximum implied move is on this stock. And so that made this kind of a no-brainer. Although, when you’re trading after hours how do you know what a no-brainer really is? A lot of people trade as if they have no brains. What I am doing tomorrow is, I am hoping that it gets some downgrades and more people are selling the stock and the stock is back down. That would be awesome. The closer it gets to the 50-day moving average the more compelling the buy is.
Now, this is just for a trade. This isn’t my kind of trade, I prefer these kinds of trades, just to be clear; where the stock is tightening up in a range and then it finally breaks out and then these are the trades that I like. I don’t like these big slam plays here but I can trade them. And that is what we are looking at tomorrow.
So if the stock is below 483.00, the lower it is the better and you want to be buying the stock, this is basically for a day trade, though you can keep it for longer if you want. But I want to be buying the stock anywhere down here, I guess you could even here but I wouldn’t then expect that much out of the trade. You are buying it down there and you are just looking for a reversion to the mean, maybe to $500.00. That’s really it, as long as the stock is below this green line you are buying it and looking for a little bit of a move to the upside.
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