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Welcome to the StockOptionAssassin.comís trade of the week. In this weekís video,
we are going to look at an earnings play in Netflix that involves selling premiums.
Letís go ahead and just look at Netflixís chart. You can see Netflix rolled over here.
This was on December 24th. It really had a pretty huge drop over the past month, six
to eight weeks. Weíre coming in to what could be potential support. Weíll call it $310
here. You have the big round number $300. It should be stronger support. Weíve pretty
much had this pretty big selloff straight into earnings. Earnings are tomorrow, the
22nd, after the bell. You have time to get in this trade today. Iím actually going to
wait until tomorrow. Iíll show you what I plan on doing for this trade.
What weíre going to do is an earnings play. Weíre not going to really pick a direction.
I really have no idea what Netflixís earnings are or what theyíre expected to be. What
I do know is the premium is super high and weíve sold off into there. My expectation
is that even if they disappoint earnings that the selloff could be somewhat contained because
itís already sold off. They could have very good earnings and this thing could rally hard.
What weíre looking for is a contained selloff or a hard rally after earnings tomorrow. Thatís
the play weíre going to set up. Weíre going to set up a put credit spread.
Letís go ahead and look at the option chain here. These are the weekly options. We have
three days left to earnings or to options expiration. You can see the implied volatility
is a whopping 128%. Iím going to expand this. What weíre looking at is what the potential
Market Maker Move is. You can see itís up here in this box where you see the MMM (Market
Maker Move). Right now, thatís about $33. You can also see over here where the implied
volatility is that itís at about $34. Letís call it $33. As of right now, as of doing
this video, itís about lunchtime on Tuesday. Remember we didnít have trading yesterday.
As of right now, the weekly options are pricing in about a $33 to $34 move over the next three
days. Letís go back to the chart. Right now, Netflix
is trading at $323. If we go $33 below that, that would put us at about $290. Letís just
draw that in real quick. Weíll draw a little line here at $290. We edit properties here.
Iím going to make this $290. Iím going to make this red, and youíll see why in a minute.
This is the expected move from where weíre trading right this second. From $323, the
expected move is $33. It could go $33 up or it could go $33 down. You can see that coincides
right with these levels. Itís going to be well below the $300 line. What I want to set
up is a put credit spread where we sell the $290. Weíre going to simply change this to
vertical and you can see if I sell this put credit spread, we would be selling the $290
and buying the $285 for protection, for a grand credit of $1.02. Thatís if we can get
those. Thereís already a little bit of volume going here.
Letís say we get $1 for this. Whatís our risk? With the $5 wide strike spread, if Netflix
stays above $290 over the next three days, we would collect all of that credit. If the
earnings were a super disaster and it blew through these levels, then we would be risking
$4 per spread. But the market maker move is usually pretty consistent, so the best thing
that could happen actually is that Netflix trades sideways to up. Letís just look at
the potential volatility crush. If I go in here and change this to theoretical price
ñ remember we said itís about $1 ñ letís say tomorrow, if we haveÖ The typical volatility
around Netflix is about 80%. You see itís 60%. Right now, itís 128%. If we were to
lose -48% in volatility, look how much this spread would be worth ñ $0.29. If Netflix
does absolutely nothing, we could sell something for about $1 and it would pretty much go to
about $0.29. Eventually, it would go to zero because itís way out of the money over the
next couple of days. Thatís the play weíre looking at setting up. Again, if we go to
sell this, remember youíre going to get about $1 credit. We are selling the $290 (we duplicate
this one) and we would buy the $285 put (and change this to green because thatís the one
weíre buying) and weíre collecting the credit. The ultimate goal is for both of these options
to go to zero before Friday. If we sell off into those levels and it holds and it chops
sideways, we would eventually be able to collect all or some of the credit.
Thatís the trade of the week. Weíre looking at a put credit spread. A lot of people will
do this on both sides where they will sell the put credit spread ñ in this case $33
down ñ but theyíll also sell a call credit spread at $33 higher. That creates an iron
condor. If it stays within that on both sides, then you would collect credit on both sides.
In this case, the way that itís sold off so hardÖ In the earnings, Iím a little skeptical
of selling the call credit spread because if the earnings are good, this thing is going
to rocket right through and it may blow past that. Iím favoring a sideways to upside move.
However, I only want to play this with the options that are below.
Hopefully that helps. You guys have a great week. I will talk to you next week!