NFLX Trade: How We Walked Away With A 140% Gain – March 11, 2022
Breaking Down Our Winning NFLX Trade
Today, I’ll show you exactly how I found this NFLX trade. I’ll also break it down step by step so that you can see how effective this strategy is for yourself.
Our first step in our top-down strategy is looking at the broader market. Is it currently trending up or down?
To find out, I started by pulling up the chart for SPY, which closely tracks the S&P 500, as seen below.
Here I found the support line (yellow) from the last time SPY traded at this level, which was back in October 2021. Once I identified my support, I looked to see if prices had bounced off it or fallen through. As you can see, we bounced back to the upside. That was a bullish move for the market, called a positive momentum divergence. SPY looked bullish.
But that is just one index. Next, I needed to look elsewhere to confirm this bullish sentiment…
The Russell 2000 had been having a tough go for a little bit after breaking below $2,100, a key level highlighted by the green line.
After cracking through this level, RUT saw a few days of choppy trading before staging a comeback in bulls’ favor.
Finally, I checked out the CBOE Volatility Index (VIX). There, I found the third piece of evidence I wanted to see… a “sell” signal on the VIX, which is a “buy” signal for the broader market.
These three pieces of evidence — positive momentum in SPY, a comeback in RUT, and a “sell” signal on VIX — are what I needed to back our bullish view on the broader market.
My next step was to look for a stock that had an attractive risk/reward opportunity for us, which brought me to our NFLX trade.
NFLX had seen a substantial decline after its most recent earnings report, but it fell into a previously defined support zone, which you can see below.
Once we had a positive momentum divergence, we used this support zone to determine where we thought our price could end up moving to. To determine this, I looked at NFLX’s historical action to find how the price acted when previously trading in this range.
At the time that I made this trade, NFLX was trading around $450.
I knew that NFLX’s past breakdown level was right around the $460 mark. This looked like a reasonable strike price for long call options. At this level, the risk/reward profile meant that our $1.60 call options could be worth upward of $9 – $10 should the stock take back that $460 price.
When the stock made its move, I told my students to set a stop loss to lock in our profits. In the end, we walked away with a 140% gain from our NFLX trade.
Author: Christian Tharp