Weak when the market was strong a short while back, NFLX has rallied sharply this week as the Dow has plummeted. Go figure. We hold a bull call spread expiring next Friday that we’d nearly given up for dead, and although it is still well out of the money, it has started to perk up.  Yesterday we did some pruning, turning our eight December 400-410 spreads into a ratio spread. We did this by selling half of the December 400s, so that we are now long four of them against eight short 410s. Do the math and you’ll see that our position will be profitable between $400 and around $415 at expiration. It would start to lose money above that; however, with the stock currently trading around $373, we should be so fortunate as to have to worry about the 410s biting us in the ass. Long before that would happen, our long 400s would spring to life and give us a good chance to exit profitably before the options expire.  The one caveat is that NFLX could explode for 50 points in a single day, turning our ‘front spread’ (i.e., negative-gamma) position lethal.  To deal with this risk, we’ll plan on buying a few Dec 415 calls when they are offered for nearly nothing. They were fetching around 0.25 at yesterday’s close, but their value will sink quickly if there’s even a hint of a stall in NFLX’s steep rally today or Monday.

Incidentally, our bull spread was part of an ostensible ‘straddle’ balanced by DIA put options.  We folded the cost of those now-worthless puts into the NFLX spread, but also took partial profits in NFLX on the way up, so that our all-in sost has been reduced to just $190.  Whenever we buy options, we treat out-of-the-money puts as having a value of zero, and calls as having only a slightly higher value. This is justified because most options purchased by retail customers expire worthless.  It is the ‘sell side’ of the game that makes money, but the most lucrative strategies are out-of-bounds for customers because of the steep margin requirements involved.

In the end, it takes all of the knowledge I have accumulated in nearly 40 years of option trading to have even a modest ‘positive expectation’ on a given trade. Fortunately, though, it is fairly easy to zero-out the  cost of an option position by taking a partial profit at the first opportunity. This we do routinely, leaving us with positions that usually cannot lose a dime but which will yield substantial leverage if our horse should finish in-the-money.

Incidentally, the stock looks primed to run up at least another $10, to the 383 target shown, before taking a breather. A pullback to the red line — a midpoint Hidden Pivot at 367.50 — should be regarded as a belated buying opportunity. ________ UPDATE: To negate upside risk above 420, buy four December 415 calls for 0.06 or better, good through Monday. I’d suggest bidding 0.04 on Monday’s opening, but raising the bid to as much as 0.06 if you’re not filled. Make the order contingent on the  stock trading 367.50 or higher. The stock looks like it’s back in staged-‘weakness’ mode, since DaBoyz evidently felt it necessary to rip off widows and orphans on Friday by opening NFLX on a bull-trap high.