Netflix (NFLX) stock broke below its 21-day exponential and 50-day moving averages on Thursday and has been showing declining relative strength since late June.
Today, let’s look at a bear call spread that assumes Netflix will struggle to get back above 1,260 between now and mid-October.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
Bearish trades can be risky in a bullish market, but can also provide a hedge against a core portfolio of stocks.
This strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
Making The Bear Call Spread Work
A bear call spread with an Oct. 17 expiration on Netflix stock — selling a call at the 1,260 strike and buying a call at the 1,265 strike — can be sold for around $1.45 a share in a 100-share contract.
Traders selling the spread would receive $145 in option premium which is also the maximum possible gain. The maximum loss would be $355. That represents a potential return of 40.8% between now and Oct. 17.
The spread achieves maximum profit if Netflix stock closes below 1,260 on Oct. 17, in which case the entire spread would expire worthless. That allows the trader to keep the $145 option premium. That means Netflix could go up 4% from its Thursday closing price of 1,208 and the trade would still achieve maximum profit.
The maximum loss will occur if Netflix closes above 1,265 on Oct. 17, which would see the premium seller lose $355 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance. A stop-loss could be set if Netflix trades above 1,250, or if the spread value rises from $1.45 to $3.90.
Bear call spreads can be a good way to potentially generate some income while a stock remains in a downtrend.
Netflix Stock Ranks First In Its Group
Investor’s Business Daily gives Netflix stock a Composite Rating of 92 out of a best-possible 99, an Earnings Per Share Rating of 97 and a Relative Strength Rating of 82. According to Stock Checkup, Netflix ranks first in IBD’s Leisure-Movies & Related group.
Despite Netflix’s strong fundamental ratings, the recent technical breakdown below key moving averages suggests potential near-term weakness. The bear call spread allows traders to capitalize on this technical divergence while limiting risk.
Netflix faces mounting bearish pressure as analysts cite valuation concerns, slowing subscriber growth, and rising content costs amid fierce streaming competition. JPMorgan downgraded the stock earlier in the year amid technical signals of overextension.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
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