Underlying Stock – NFLX (Netflix)
Strategy – Bull Put (Credit) Spread
The strategy involves selling an Out of the Money Put Option of an underlying stock and buying further out (most often the next strike price) less expensive Out of the Money Put Option for protection. These selling and buying different strike price put options creates a credit and that’s the maximum profit for the trade if successful. Maximum loss will be the difference between sold and bought put option strike prices.
Outlook and Action
NFLX traded outside the lower Bollinger band and found support after last weeks massive sell off. On Thursday 15 June it traded outside the lower Bollinger band but later during the day prices came back inside and formed a hammer candlestick pattern. On Friday 16 June it stayed inside the Bollinger band and a Buy signal day flashed with some of the technical indicators I use. All it means is that prices are ready to have a short term surge. RSI and MACD Histogram both indicators pointing upwards on Friday 16 June (Green arrows in the chart) which confirms the short term upwards move. I waited on Monday 19 June for prices to move towards same direction as the Signal Day and as it did took the trade.
General tendency for prices is that, once it trades outside the Bollinger Band, it comes back inside fairly quickly and stays inside for a while. Like an elastic band comes back to its original shape once it is released after stretching.
Strike prices were outside the lower Bollinger band and below most recent low. There was no red flag with this trade, pretty safe trade. OTM (Out of the Money) probability was above 91% when taking this trade, meaning there was 91% chances that the prices would not hit the sold strike price ($147.00) by the expiration date.
| Side | Quantity | Symbol | Expiration date | Strike price | Type |
| SELL | 10 | NFLX | 24-June-17 | 147.00 | PUT |
| BUY | 10 | NFLX | 24-June-17 | 145.00 | PUT |
Capital requirement to do this trade was $2000 and have received $0.13 credit per share. If successful with the trade, I would make $108.05 net profit, that’s 5.4% return on the capital invested in 5 days. Below is the calculation.
| Capital requirement/maximum loss | $2000.00 | 10 contracts, each options contract consist of 100 shares, $2.00 spread between strike prices (10 x 100 x $2.00 = $2000). |
| Projected Net profit | $108.05 | ($0.13 x 100 x 10 – $21.95 commission = $108.05 |
P.S Please note that the trade is now closed. Do not copy and place a trade unless you are an expert and know what you are doing. This writing is only for educational purposes. Trading is risky without proper knowledge, practice, expertise and mentorship.