Netflix (NASDAQ:NFLX): The Exact Trigger that Indicates Bearish Momentum
Date Published: 2019-01-18
DisclaimerThe results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
PrefaceWith a bullish momentum back-test in Alphabet (GOOGL) set up soon, we turn to the other side.
Netflix has been the apotheosis of a momentum technology stock -- an one time innovator turned Wall Street darling.
But, even in that time, there is a trigger in Netflix that has preceded stock drops, turning a massive bull into a profitable bearish momentum back-test that has shown triple digit returns on a bearish trade while the stock was up more than 200% -- a complement to a naked long position.
There is such a technical condition, and we will review it, right now. We reviewed a similar approach in Nvidia, which you can access here:
The Exact Bearish Trigger in Nvidia.
The Short-term Bearish Option Trade in NetflixWe will examine the outcome of going long a short-term out-of-the-money (40 delta) put, in options that are the closest to 21-days from expiration. But we follow some rules:
* Never Trade Earnings
Let's not worry about stock direction or earnings, let's try to find a back-test that benefits from volatility. Here it is, first, we enter the long put.
* Use a technical trigger to start the trade, specifically:
Wait until the day that the stock price crosses below the 200-day moving average. Here is a nice simple image of the technical requirement:
* Finally, we set limit:
* Use a 30% limit gain.
* Close the trade after 10 trading days, if the limit has not been hit.
At the end of each day, the back-tester checks to see if the long put is up 30%. If it is, it closes the position. If after 10 trading days the limit has not been hit, the put is closed so not to suffer total time decay.
RESULTSHere are the results over the last three-years in Netflix:
The mechanics of the TradeMachine® Stock Option Backtester are that it uses end of day prices for every back-test entry and exit (every trigger).
In a period where the stock was up 227%, this bearish position was up 171%. The bearish trigger, in the past, has worked exceedingly well, even during a bull market and makes a complementary trade to being just long the stock.
Setting ExpectationsWhile this strategy had an overall return of 171%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 71.8%.
Checking the Moving AverageYou can check to see the moment a stock dips below the 200-day MA for NFLX on the Pivot Points tab on www.CMLviz.com.
WHAT HAPPENEDBecome the expert in the room.
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You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.