Netflix (NFLX) stock was a bearish candidate that came up on one of my Barchart Stock Screeners having put in a bearish engulfing candle yesterday.

Here are the full parameters for the screener and the results.

Today, we’re going to look at a Bear Call spread trade that assumes NFLX will struggle to get back above the 1300 level in the next few weeks. 

A Bear Call spread is a bearish trade that also can benefit from a drop in implied volatility.

The maximum profit for a Bear Call spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

NFLX BEAR CALL SPREAD

To create a Bear Call spread, we sell an out-of-the-money call and then by another call further out-of-the-money.

Selling the September 19 call with a strike price of $1300 and buying the $1320 call would create a Bear Call spread.

This spread was trading for around $2.70 yesterday. That means a trader selling this spread would receive $270 in option premium and would have a maximum risk of $1,730.

That represents a 15.6% return on risk between now and September 19 if NFLX stock remains below $1300.

If NFLX stock closes above $130 on the expiration date the trade loses the full $1730.

The breakeven point for the Bear Call spread is $1302.70 which is calculated as $130 plus the $2.70 option premium per contract.

COMPANY DETAILS

he Barchart Technical Opinion rating is a 56% Buy with a Weakest short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Netflix is considered a pioneer in the streaming space.

The company evolved from a small DVD-rental provider to a dominant streaming service provider, courtesy of its wide-ranging content portfolio and a fortified international footprint.

Netflix has been spending aggressively on building its original show portfolio.

This is helping it sustain its leading position despite the launch of new services like Disney and Apple TV as well as the existing services like Amazon prime video.

Netflix streams movies, television shows and documentaries across a wide variety of genres and languages. 

Subscribers, both domestic and international, can watch them on a host of internet-connected devices, including television sets, computers and mobile devices.

In the Domestic DVD segment, Netflix delivers DVDs through the U.S. postal service from distribution centers located in major U.S. cities.

Conclusion And Risk Management

One way to set a stop loss for a Bear Call spread is based on the premium received. In this case, we received $270, so we could set a stop loss equal to the premium received, or a loss of around $270.

Another stop loss level could be if the stock broke above $1280.

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.