Published On: Tue, Feb 14th, 2017

Value seen in put spread on overbought Netflix

InstaForex

Medium term

/

Sell

Trade view / 58 minutes ago

Global Head of Listed Derivatives and Index CFDs Sales / Saxo Bank

Denmark

Instrument: NFLX:xnas

Price target: 138

Market price: 143.20

Background


After a nice ride from $ 110.68 to $ 145.93, shares in US video streaming company Netflix (NFLX:xnas) are now overbought.

 

There is a bearish divergence on the relative strength index (RSI).

Stochastics, the RSI and moving average convergence divergence (MACD) are giving a bearish signal.

Let’s buy the Mar17 (expiry March 10) 143/138 put spread to play a retracement on $ 137.61 (23.6% of retracement of 110.68/145.93).

NFLX share price

Management and risk description

Entry: Buy Mar17 (exp March 10) 143/138 put spread at $ 1.82 or $ 182 for one spread

=> Buy Mar17 143 put at $ 3.34

& Sell Mar17 138 put at $ 1.52

Maximum profit at expiry is limited

Maximum profit at expiry achieved when underlying price =< short strike price

At expiry maximum profit = long strike price minus short strike price minus premium paid

= $ 143 – $ 138 – $ 1.82

= $ 3.18

Return on Investment if the market closes at $ 138 or below at expiry

= Profit/premium X 100

= $ 3.18/$ 1.82 X 100

= 174.72%

Maximum Loss

Maximum loss is limited to premium paid

Maximum loss is $ 1.82 or $ 182 per put spread

Break even Point at expiry

= Long strike – premium paid

= $ 143 – $ 1.82

= $ 141.18

Stop: At 50% premium loss

Target: $ 138 or lower

Time horizon: 25 days

— Edited by John Acher

Non-independent investment research disclaimer applies. Read more
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