Remember last week when I didn’t want to spend $43 to close my NFLX naked put? Well, that would’ve been a bargain compared to what I spent today. The good news is that I didn’t make today’s trade out of fear of an option assignment. Instead, I rolled my position higher to take advantage of the volatility that’s spiking this week. While NFLX was trading at $252.68, I bought to close one NFLX March $205 naked put for $1.42 and sold to open one NFLX $235 naked put for $11.62. I received $1,018.74 after paying $1.26 in commission for the diagonal calendar spread.
I received $529.31 when I sold the March $205 put and I paid $142.62 to close it today. That gives me a realized gain of $386.69 in just over three weeks. NFLX was trading at $254.00 when I placed my limit order and thought it might hit tomorrow morning, but then the entire market fell down another large step and the trade went through before the day’s selling was over, i.e. I could’ve made more than I did.
I’ve been eyeing this trade all week and couldn’t wait any longer when I saw the S&P 500 retesting its intraday low from Tuesday morning. I’m expecting support to surface on the large cap index and along with that support, I think most stocks will find their footing. If I’m wrong and stocks overshoot the previous low, I sold the new put $17.68 out of the money to give me a deep cushion. NFLX can fall 11.59% more before I take a loss. If NFLX stays above my strike, I’ll make a 5.20% gain (26.38% annualized). If assigned, my cost per share after deducting the premium will be $223.39.
I chose the $235 strike based on technical reasons more than anything else. NFLX topped out at $286.70 on January 29. If it drops 20%, it’ll hit $229.36, above my cost per share. I drew a few trend lines that supported my decision too. The longer trend line of higher highs beginning with the intraday high on October 24, 2016 and then touching the intraday high on July 24, 2017 and (just above) the intraday high of January 16, 2018 is trending around $235 as of today. I expect this line to hold support. It’s within a dollar of the shorter trend line of higher lows (also ignoring the gap higher from January 23 that was retested this week) that runs from the intraday high on October 17 through the January 16 intraday high. Having these two trend lines close together helps since previous resistance often becomes support when a stock revisits the old trend line. Adding more support around $230-235, the 50%Fibonacci line is around $232.50.
Even if those lines of support fail, I don’t think NFLX will fall below its intraday high of $227.79 on January 22. This price is 20.5% below NFLX’s all-time high and would give the stock the opportunity to fully “fill the gap” from the day before it gapped higher. The one big fear I have with NFLX is its p/e ratio. Using forward guidance, NFLX has a p/e ratio of 60, well north of what I like to own. However, NFLX has been much higher than that for years and I think it’s like AMZN in how investors push the multiple beyond what most of us consider reasonable.