Options Trade of the Day: A Netflix Weekly Short Call Spread

By
A A A

Shares of online movie rental firm Netflix Inc. ( NFLX ) have soared nearly 15% so far today, as traders rush to capitalize on the company's stronger-than-expected quarterly report . In fact, the stock gapped above potential round-number resistance at the $200 level, and has set a fresh all-time high in the process. NFLX currently has its sights set on the $210 region, an area that capped the shares back in December 2010.

Daily chart of NFLX since July 2010 with 10-day and 20-day moving averages

Naturally, options speculators are out in force today, with call volume spiking to nearly 70,000 contracts, or about five times the stock's daily average, while put volume has swelled to more than 57,000 contracts, more than quadrupling NFLX's average daily put volume. After taking a closer look at the stock's call volume, however, it quickly becomes clear that not all of this activity is bullishly oriented. In fact, one trader in particular appears to have initiated a short call spread on NFLX, using weekly options.

Specifically, a block of 288 January 28 215-strike calls traded around 11:05 a.m. Eastern time on the Philadelphia Stock Exchange (PHLX) for the bid price of $0.54, or $54 per contract. The second half of the spread was located at the January 28 220-strike call, where 288 contracts traded on the same exchange at the same time for the ask price of $0.19, or $19 per contract. Given this data, it would appear that we are looking at a short vertical call spread, more commonly known as a credit spread , on Netflix. This options strategy is also known as a short call spread, or a bear call spread.

NFLX call option volume details

The Anatomy of a Netflix Short Call Spread

The trade breaks down like this: The trader pays $5,472 for 288 January 28 220-strike calls -- ($0.19 * 100) * 288 = $5,472. Meanwhile, the trader receives a credit of $15,552 for selling 288 January 28 215-strike calls -- ($0.54 * 100) * 288 = $15,552. As a result, the trader has pocketed a net credit of $10,080 -- $15,552 - $5,472 = $10,080. The breakdown for this credit spread is listed below:

NFLX short vertical call spread breakdown

Breakeven for this trade is equal to the sold strike plus the credit received, or $215.35 -- $215 + $0.35 = $215.35. The maximum gain is equal to the total premium received -- $10,080 -- while the maximum loss is limited to the difference between the January 28 220-strike call and January 28 215-strike call, minus the net credit received, and is reached if NFLX trades at or above the purchased January 28 220-strike call. In this case, the maximum loss is $4.65, or $465 per contract -- (220 - 215) - 0.35 = $4.65, or $133,920 for the total position. Below is a chart for a visual representation:

NFLX short vertical call spread profit/loss chart

The winter 2011 issue of SENTIMENT magazine is now available here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.


This article appears in: Investing , Options

Referenced Stocks: NFLX

Schaeffer's Investment Research

Schaeffer's Investment Research
  • See all for Schaeffer's Investment Research
  • View Print Version

More from Schaeffer's Investment Research:

Related Videos

Stocks

Referenced

Most Active by Volume

183,639,073
  • $42.32 ▲ 3.85%
82,623,623
  • $15.99 ▼ 22.79%
39,547,942
  • $119 ▲ 1.19%
32,107,751
  • $77.62 ▲ 2.63%
29,684,848
  • $10.60 ▲ 2.02%
27,615,309
  • $24.03 ▲ 0.38%
26,917,669
  • $31.10 ▲ 2.07%
26,464,306
  • $47.75 ▲ 0.59%
As of 11/26/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com