Chart Review Update: Netflix Surge Closes Post-Earnings Gap Down

Just last week, I noted how Netflix (NFLX) neatly confirmed a bearish abandoned baby top with another earnings implosion. However, I did not discuss in more detail the implications of the stock’s strong bounce from its lows on the day although I tweeted about it. The following day, NFLX had a strong day marginally closing above its 50-day moving average (DMA). I tweeted again about its surprising post-earnings strength.

Then, on Friday, the stock sunk in what looked like a classic fade from resistance at the 50DMA. Instead of lingering at its lows, NFLX suddenly turned upward. And then spikes of buying volume showed up. And then, just like that, NFLX was above the 50DMA and at a high of the day. Almost instinctively, I reached for a Nov 2 weekly call to hedge my short Nov call spread. I was just in time. After hitting its high of the day, NFLX practically went parabolic and closed the day up 13%. Here are the charts:

Netflix surges in almost parabolic, intraday form
Netflix surges in almost parabolic, intraday form

Netflix fills its post-earnings gap
Netflix fills its post-earnings gap


As the day neared a close, I finally found news that NFLX was gunning on yet another rumor that the company may be acquired. I did not know at the time, but the rumored acquirer is Microsoft (MSFT). With my weekly call now equal to the profit I previously had in the short call spread (and the call spread back to even), I decided to make one more move and buy a weekly put. My thinking at the time is that if the rumor proves false (which it SHOULD), NFLX should tank like a stone. On such a move, I could probably salvage a slight profit on the weekly call as the stock falls, sell the put for a nice profit, and continue riding the short call spread back downward again. (With hindsight, I regret that I did not close out the short side right after the post-earnings gap down. I could have sold the long side on Friday as an unexpected bonus).

All this trading had me thinking that I may have stumbled upon a low-risk, high opportunity trade featuring selling spreads for premium and using some of that premium to buy options in the same direction as the spread. This is a method that should work in cases where the stock seems ready to move fast in either direction. Stay tuned on further thoughts on this options setup.

Note that I am eager to end the current trade in NFLX because, as I pointed out in August, it seems likely to me that CEO Hastings Reed might finally BUY some shares in his company given other insiders were loading up at the time. Such a move from Hastings would surely send NFLX on a sustained rally.

In the meantime, we have analysts debating about the benefits of a MSFT acquisition of NFLX while some trader or traders are having a great laugh out of being able to goose the market for fun and profit.

Here is the options team from CNBC discussing the situation: they were generally skeptical of a deal and pointed out how much money can be made fading rumors.

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