Options Profit Engine June 21, 2017 Issue
This Week’s Trade Recommendation: Sell the July 14th Netflix (NFLX) 138-143 put credit spread for a $0.46 CREDIT
Selling a put credit spread involves selling one put and buying another in the same expiration period. The short put should be closer to the stock price, while the long put is purchased further away (lower) and is used for protection.
With NFLX trading at $154, we are selling a 15 delta put spread (roughly 85% probability). Feel free to sell down to around $0.40. I recommend doing a 5-lot trade, but you can alter your contract size based on the size of your account. For examples of how to execute a credit spread, please refer to my quick start video on credit spreads.
NFLX isn’t likely to continue dropping due to upcoming earnings. Nevertheless, implied volatility remains elevated in options which expire prior to earnings, giving us an opportunity to sell put spreads.
Trade Analysis
The tech selloff is continuing to provide us with trade opportunities on the sell side. It’s been a bit more difficult lately to find options to sell on tech names because earnings are coming up in a lot of stocks (and after this week we may be back to buying options or looking at ETFs only for selling opportunities).
Nevertheless, there is a good opportunity to sell put spreads this week in Netflix (NASDAQ: NFLX), which doesn’t have earnings until late July. NFLX got hit pretty hard during the tech selloff but has stabilized in terms of price in recent days.
Despite the stock price flattening out, implied volatility has remained elevated – both in terms of recent implied levels and compared to historical volatility. That’s exactly the situation where we like to sell options.
And, NFLX shouldn’t have substantially more downside prior to earnings, which gives us a nice situation for selling puts spreads. We have a solid $11 cushion of safety before we hit our short strike – and don’t forget, we’ll be out of this trade before earnings hit.
So here’s the trade once again: Sell the July 14th Netflix (NFLX) 138-143 put credit spread for a $0.46 CREDIT.
Open Position Update:
Portfolio Commentary
We have two open positions at the moment.
FEYE July 14th 16 Straddle – Time decay is hurting our straddle a bit, but we still have three weeks before expiration. What’s more, the stock only needs to drop another $0.50 for this trade to be a winner. Right now, since we’re close to the breakeven point, there’s no reason to do anything but wait.
BABA July 28th 117-122-155-160 Iron Condor – The BABA condor is working perfectly. Even though the stock has been moving quite a bit, it’s stayed well within our range. And, volatility has already lessened to the point the trade is a 6% winner in just the first week. This is precisely how an iron condor is supposed to work. At this point, we’ll be looking to close the trade in about two weeks.
Market Overview
This past week has actually had a bit of excitement in terms of financial news. The Fed raised rates and announced it will start looking at reducing its balance sheet. Amazon (NASDAQ: AMZN) announced it will be acquiring Whole Foods Market (NASDAQ: WFM).
The public turned its attention to the potential of a major disruption in the healthcare industry. And, the tech sector remained a bit more volatile than usual. Considering there hasn’t been much going on lately, it was actually a pretty interesting week for investors.
Given the July 4th holiday approaching, things may quiet down a bit before the action picks up again.
Volatility Review
It may seem bit shocking, given how ridiculously low volatility has been for a very long time, but the VIX may actually be trending slightly higher. Crazy, I know.
Granted, even a higher average VIX is going to be lower than what we used to consider normal. Still, if the volatility regime is going to adopt a lower standard average, than even small trends higher should be paid attention to. The tech selloff contributed to a slight elevation in the VIX, which we can see in the chart below.
What’s interesting is that once the spike reversed, VIX levels did not fall all the way back down to recent lows. It could be a sign that investors are finally expecting a bit more action in the markets in the coming weeks.
The potential for higher interest rates and the Fed balance sheet reduction may be at least partially behind the higher floor in volatility.
As I mentioned earlier, with earnings season coming up, we want to make sure to focus on stocks where the implied volatility isn’t jacked due to upcoming earnings.
We were fortunate to find elevated volatility in NFLX, where we could sell a put spread with no concern about earnings results. After this week, these tech put spreads/iron condors probably won’t be possible to sell until after earnings season.