Despite the nearly 60% haircut already experienced by shares of Netflix
(NASDAQ: NFLX ), lower prices look to be in the offing. Once a stock becomes as
oversold as NFLX, buyers often step in to stem the decline and some type of
relief bounce commences. The strength of the bounce often is a revealing signal
as to what the future holds. If the stock rallies strong, it might indicate a
short-term bottom is in place. If the stock simply putters sideways and the
increase in buying isn't sufficient to create any type of relief bounce, it
often indicates more pain to come. Unfortunately for NFLX shareholders, the
response to the recent selloff has been quite underwhelming to say the least.
Source: MachTrader If the support level at $125 gives way, NFLX could see a new
wave of selling seize the stock. Put spreads represent a cheap, defined risk
play to exploit a continuation in the downtrend. Traders could purchase the
November 125-115 put spread by buying to open the 125 put and selling to open
the 115 put. The maximum risk of the spread is limited to the debit paid at
inception, and the maximum reward is the distance between the strikes minus the
debit. With a value around $4, the spread currently risks $400 to make $600. At
the time of this writing, Tyler Craig had no positions on NFLX.
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