Dissecting A Trade In NFLX.

I am taking a moment to reflect on a trade, done today posted real time on Twitter and discuss my thought process and why i think being creative with options is important to ones success.  Going straight directional all the time can become dangerous and choppy, and is not something i like to do when playing beta names.  Sure if your playing a name with low beta and it is not a volatile mover sure your in a sense forced to stay directional as the options are inexpensive.  Anyways off we go...

Looking at this it is difficult to read but the blue one is our entry we got long weekly 175 calls here at 3.10 so we retraced the morning move and popped, began to flag and we got involved.  We got our first spike and quickly took 1/5 off booking a .40 gain, nothing crazy but we now have more rope.  So next we came back in and retested the prior break out now you could get shook out here easily but knowing that a few moments ago we already booked some gains we can give it rope and allow the set-up to continue.  Okay so next we took out previous days highs, and we sold another piece +.95 on 1/10 of our original position.

So we now stand with 30% of our position booked with .60 in profit and now can easily put a stop in on the balance at break even and be happy with a nice little trade, or the trade has follow through and we can make more knowing at this point we have no risk in the position.

So we consolidate test prior break out again and resume rallying and we book another 1/5 of the original position +1.40 on half and 1.45 on the other half.

We are now out of 1/2 of our position with average profits of .85 average.  Now we are sitting with a really nice trade booking solid gains and half the position to continue to run and pick up more profits.

Again we come back in consolidate test prior break out level and rip higher and we peel off another 1/10 of our original position +2.95 a huge gainer 100% gain in a single day, but we still love the set up and want to be involved.

So where are we now?  We have an average profit of 1.20 on every contract we have sold.  Looking good almost 50% gain, but now the dilemma is this we have solid gains, but our remainder position is now worth 5.85 almost double our original price we paid, and are now assuming risk of a day trade sized position over night if we want to continue.  Do we want to take that sort of risk over night?  No there is no reason too especially on a name that has essentially tripled rather quickly and a company which could certainly use this as an opportunity to raise cash through share dilution.  We don't want to wake up and see our nice winner turned into a loser because we took too much risk over night.  So this is where creativity comes in and allows us to participate further upside.

So how can we stay involved participate more in the upside but eliminate some risk to the downside, well, we browse the options chain and at this point premium is well, expensive so we want to take advantage of this. So I decide to turn this into a call fly and I picked prices where i would lock in additional gains and have room to the upside.  I chose to create a 175-185-195 call fly, and by doing so I took in 3.70 in premium and remember our initial price was 3.09, where we want to stop out on our trailers.  So what have we done well we just guaranteed ourselves a .60 gain on our balance all the while we can participate in another 10 points of upside.  Capping our gains at 10.60 on the balance and to 185 for NFLX.  Can NFLX run to 200 these week sure and our play will not look so hot then as we would just book .60 on our balance but that is fine.

In addition we have many options here to again be creative maybe NFLX opens down 5 points tomorrow and we see an opportunity for a reversal well we can simply by back the body of the butterfly and sell to close the win (195 calls) and book those gains and see if we get the reversal and keep a stop where we will either break even on balance of gains whichever your comfortable with.  The beauty is then if NFLX does reverse and we want to stick with it further we can simply do the same strategy again for going over night.

If NFLX gaps up 10 points well certainly our body appreciates on a percentage basis more than our wing (175 calls) but our other wing offsets some of this (195 calls). Well now we have many options again if we think there is more follow through we can sell out 175 calls booking gains buy back the body taking the loss there, but still profiting overall and leave our other wing (195 calls) on for the run to 200.  And maybe we take those and create a spread or butterfly.  The possibilities are endless, but if we just keep the calls we are assuming more risk then we want to using a very volatile instrument and we limit our options if NFLX opens down to just exiting or hoping for a rebound.

Markets aren't simple and being creative with plays I have found makes a lot of sense, and well, a lot of money.

I will certainly update this trade, and potentially make it a series for the week if it continues to play out interestingly.

For now we have solid gains locked in and room for huge gains.  I was speaking to someone about trading, specifically options trading, and I said to them look at every trade as a piece of art and meld it into something that benefits you and allows for excellent risk/reward.  Truth is this trade is a guaranteed winner of $1 on average for each contract 33%, with the potential for $5 average 160% and a lot of of possibilities in between that range.


Happy Trading, Good Luck!!!