The set-up: After a 2 percent correction in the FANG stocks last Friday, the dip buyers showed up in force for Facebook, Amazon and Alphabet (formerly known as Google). The volume and sentiment in Netflix, however, has disappeared.
Netflix is trading lower this morning pre-market and hasn’t benefitted much from recent dip-buying in the large-cap tech space.
Why buy NFLX puts today: If the stock breaks below $147. 42 with conviction, I believe that July’s at-the-money put options could deliver a 5 to 10 percent gross profit intraday, maybe more depending on your risk tolerance of an overnight hold.
When I’ll buy to open put options today: Netflix needs to break next support — $147.42 — to be an attractive short trade. I don’t know what time that will be, but pre-market my charts are set up accordingly, ready and waiting on that break, potentially at the open.
When I’ll close those options: Assuming my buy is triggered, I’ll sell to close my put options for profit if/when Netflix hits $145. At that price, NFLX technically becomes oversold with the RSI below 30; while shorts have made some money over the last nine years, the people making the real money in the long term are the ones buying and holding every dip. I’ll set a stop-loss in case dip buyers show up with conviction on support levels; that’s why my trade is dependent on a break of support with conviction and not just for a quick second.
Bonus point: An oversold technology giant stock like Netflix creates a chart pattern – an oversold chart — which everyone will love to buy should dip-buying continue. This is always a potential buying opportunity.
Davis Martin is the publisher of DailyProfitMachine.com. He trades SPY calls and swing trades stocks and stock options. At the time this article was published on RagingBull.com, he had no open positions, options or orders in NFLX. He has never traded NFLX because he doesn’t chase trades; if the stock moves as described here, he will be making his first trade in the stock.