Everyone has binged a Netflix series at least once…right?
But, how about a binge on Netflix stock by selling a credit spread for the tune of $464 of profit in just 3 days?
That’s what we did.
During a live trading session with my Smart Option Income subscribers, I recommended a bullish spread on Netflix [stock_market_widget type=”inline” symbol=”NFLX” template=”basic” color=”default”]. The credit spread is the go-to trading strategy for income sellers, as it takes advantage of overpriced option prices by selling premium and watching that premium dissipate over time.
NFLX was enjoying a monster 2018.
In fact, the stock was up more than 40% for the year when we entered this trade. But I wasn’t put off by the stock’s strength. The shares had rebounded from the market correction earlier in the month but had not yet retraced the entire loss.
And they had respected their 20-day moving average (red line in chart below), which supported the pullback. Furthermore, they were not technically overbought.
To put on a credit spread, you have several decisions to make (assuming you’ve decided on a stock and direction).
What strikes do you choose?
This involves deciding how far out of the money the sold strike should be and how wide you want the spread. For NFLX, I wanted a sold strike that was below the supportive 20-day moving average so that the stock would have to break that support to move my sold option into the money. With the stock at 277 and the 20-day at 268, I settled on the 257.5 strike (blue line in the chart).
The next question was spread width.
I looked at the credits for both the 2.5- and 5-point widths and went with the wider spread by buying the 252.5 strike.
Next on the decision list was duration – how far out in time do I want to go?
Usually, I prefer trades that are three to eight weeks out. They provide a good balance between time decay and having enough premium to decay. For NFLX, I went with a March 29 expiration, or 35 days out. Note that these are weekly options, which I use frequently to fine tune my trading.
Let’s Look at the Trade
With a neutral to bullish outlook on NFLX, I sold the March 29 257.5 put and bought the March 29 252.5 put for a net credit of $1.05, or $105 per spread. I put up margin (also known as “buying power reduction”) of $3.95 ($395 per spread) for the trade (equal to the spread width minus the credit), so that the return on margin for this trade was 26.6%. Not bad for three weeks.
How did the trade turn out?
We cashed out of this position in just three trading days.
NFLX kept the momentum going, gaining more than 5% in those three days. The move pushed my put spread further out of the money, reducing its value below $0.50 on February 27. I ended up buying back the spread (closing the trade) for $0.47. I kept $0.58 of the initial credit for a final return of around 15% on margin.
Why the early exit?
Why not let the trade go to expiration and keep the full $1.05?
My reasoning was simple. I can bank $58 of profit after three days, free up $395 of buying power and move on to the next trade. Or, let the trade ride for another 30 days to collect the remaining $47 in credit and hope that NFLX stays above the 257.5 level.
I went for the safe play, preferring to take a solid 15% gain in a few days rather than sweat out another month of volatility.
We sold 8 Netflix credit spread contracts for a total of $464 before trading costs…a solid return in three trading days.
Credit spreads are all about smaller, more frequent wins. They’re not looking for the home run. I’ll take that kind of performance to the bank any time.
And so will Smart Options Income members.
Find out how I make money in the options market every day (even weekends) with my “80-20” Trade Scan Strategy. Download my FREE Guide: 5 Costly Mistakes Every Option Trade Makes and start winning 75% to 80% of your trades Selling Overpriced Options.
About The Author
Jon Lewis is a 20-year veteran options educator, trainer and trader who helps investors master options trading strategies and tactics using spread options profitably and safely in portfolios of any size.
His advantage, and now yours, is using simple, often overlooked spread options strategies which generate consistent income without significant risk.
He’s a published writer in reputable publications which include: Bloomberg, Personal Finance, Active Trader, Stocks, Futures & Options, and CNBC, and he has created and directed several options trading services and education programs.
Most recently, he’s led over 500 students in the application of his 30-Minute Trading Strategy which uses credit spreads to capture short-term gains on Fridays.
Right now, his focus is how to use credit spreads as a secret weapon inside your portfolio to produce 20% or higher NET annual income.