Netflix has room left to run

Danielle Shay joins CNBC’s Trading Nation to discuss Netflix. Click the image to watch the full segment.

Netflix has been downgraded due to the massive move it’s already made this year, and I can understand the downgrade. After all, it’s up 50% — how much more could it go?

I normally wouldn’t expect a stock to continue higher, but in this instance, I do. Why? NFLX is up another 5% today! Normally near a top you’d see a loss of momentum, and investors taking profits but this isn’t happening here. I can see that this market has yet to lose momentum, and NFLX is one of my favorite COVID darlings (along with Crowdstrike (CRWD), Peloton (PTON), Chewy Inc. (CHEWY), and Zillow (Z)). These darlings aren’t just surviving… they’re thriving through these times.

The Setup:

What I’ve seen in particular, is that in the two-week span of time before earnings, investors anticipate positive COVID impact on NFLX and tickers like Crowdstrike (CRWD), Peloton (PTON), Chewy Inc. (CHEWY), and Zillow (Z) alike. So they buy the stock in masse, which pushes up the price even further. In the case of NFLX, it has earnings next week — and as such, I expect it to continue higher into the earnings report.

This is a pretty clear pattern that I love to trade in the options market. My target on NFLX for this setup, prior to earnings was $500 (which just got hit today!) and then $550. As we’ve already hit the first target, I’m eyeing the second target on this momentum move. 

How I’d trade it:

Typically I like to buy in the money options in the earnings series, to capitalize on a rise in price + IV. I also like to use bullish butterflies with the center strike at my target. I suggested one butterfly with a target price of $500 in the options room, and while $550 is a bit lofty after the move today, I still like it for a low-cost butterfly. How long will the momentum continue? With momentum trades, we never know. I just ride them until it fades and as long as the momentum continues, I continue remaining long. At some point the massive amount of money that has gone into these COVID names will start coming out… but not just yet!

To watch the full segment, click here.


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