Netflix Stock Soars Following Earnings, but Can It Sustain the Momentum?
Netflix (NFLX) saw a significant surge in its stock price on Wednesday, following its earnings report, closing up 10.7% in massive volume. However, analysts are skeptical about whether the stock can maintain this upward trajectory in the short term. Traders who share this sentiment may consider a bear call spread strategy.
What is a Bear Call Spread?
A bear call spread is a trading strategy that involves selling an out-of-the-money call option and buying a further out-of-the-money call. This strategy allows traders to profit if the stock trades lower, sideways, or even slightly higher, as long as it stays below the short call at expiry.
Trade Setup for Netflix Stock
In the case of Netflix, traders can sell a bear call spread for the February 16 expiration using the 590-595 strike prices. Based on recent trading, this spread can be sold for around $0.65 per set of option contracts. Traders who sell this spread would receive $65 in option premium as their maximum possible gain. The maximum loss, on the other hand, would be $435, calculated as the width of the two call option strikes minus the premium received, multiplied by 100.
Risk vs. Reward and Stop Loss Strategy
The maximum loss would occur if Netflix stock closes above 595 on February 16, resulting in a loss of $435 on the trade. It is important to note that a bear call spread is a risk-defined strategy, meaning traders always know their worst-case scenario in advance. To mitigate further losses, traders can set a stop loss if Netflix stock trades above 570 or if the spread value rises from $0.65 to $1.30.
Considering Netflix’s Ranking and Ratings
According to IBD Stock Checkup, Netflix stock is ranked No. 1 in its group and has impressive ratings across the board. It has a Composite Rating of 99, an EPS Rating of 98, and a Relative Strength Rating of 93. These ratings suggest that Netflix is a strong player in the market, despite the concerns surrounding its short-term performance.
Proceed with Caution and Consult Your Financial Advisor
It is crucial to remember that options trading is risky, and investors can lose 100% of their investment. This article serves as educational content and should not be considered a trade recommendation. It is always advisable to conduct thorough research and consult a financial advisor before making any investment decisions.
By Gavin McMaster
Gavin McMaster is an options trader specializing in income trading using options. He emphasizes a conservative style and believes that patience in waiting for the best setups is key to successful trading. Follow him on Twitter at @OptiontradinIQ.
Analyst comment
Positive news: Netflix stock soared following earnings, closing up 10.7% in massive volume.
Neutral news: Analysts are skeptical about whether the stock can maintain this upward trajectory in the short term.
Short analysis: The market may see some volatility and uncertainty in the short term as traders assess the sustainability of Netflix’s stock surge. Investors should proceed with caution and consider consulting a financial advisor before making any investment decisions.
