Today we’re breaking down a trade setup in Netflix. You’ll learn how I use technical analysis, multiple time frames, volatility patterns, and implied volatility to build out a trade.

And just so we’re clear, this is not a recommendation.

Eye Candy

With so many companies reporting earnings over the next few weeks, it’s nice that NFLX has its release in the rearview mirror. Now we can swing away without fear of earnings upending our position. Let’s begin with the weekly view. Assessing this larger time frame paints a clearer picture of the overall trend as well as crucial support and resistance zones that may not be obvious on the daily chart.

Take a look at this graphic and tell me what you see. Then compare to my takeaways below.

First, the weekly trend is bullish and sitting atop the 20-day, 50-day, and 200-day moving averages.

Second, we’ve had eleven weeks of sideways consolidation directly beneath overhead resistance at $380.

Third, the six-month drop, pop, and chop formation sure looks like a cup-and-handle.

Fourth, volume patterns have turned quite bullish this year – multiple accumulation weeks with zero sign of distribution.

Fifth, earnings last week was strong enough to support the 2019 recovery. And with this week’s bullish candle shoving the stock up against resistance, a breakout is imminent.

For greater detail, we turn to the daily chart.

While it would be cleaner if the cluster of resistance areas atop NFLX stock all merged at the same level, the breakout pattern here is still valid. Let’s just call the $380 to $385 zone resistance. While conservative traders may wait for a breach of $385, more aggressive participants may look to hop in on a rise above today’s high.

The Volatility Lens

Volatility cycles between periods of compression and expansion. Prices pause, run, pause, then run again. Times of pause act as a coiled spring, building energy soon to be released.

Traders seeking opportunity through the volatility lens use indicators like Bollinger bands to identify when a security is rested and poised to pop. When the bands constrict or squeeze together, it reflects a stock that is currently coiling or building up energy for a breakout.

The distance between bands narrowed months ago and has remained tight ever since. This homeostasis can’t last. And if Monday’s burst is any indication, bulls are about to end the stalemate.

Option Premiums

The options market provides a veritable buffet of bullish strategies to choose from. To help in our selection, we can look to the implied volatility indicator to determine if premiums are cheap or expensive. With earnings now over with, would you be surprised to learn that implied volatility has descended to the lower end of its one-year range for Netflix?

You shouldn’t be. This virtually always happens on the back end of a quarterly report. At 32%, NFLX implied volatility now sits at the 19th percentile and suggests option buys aren’t a bad way to go.

And by “option buys” we’re talking about long calls or bull calls. For those unwilling to brave the rapid-fire gains and losses generated by a straight call play, the June 380/400 call vertical currently trades for $8.30 and offers a decent alternative.

The risk is limited to $8.30 and will be lost if NFLX sits below $380 at expiration. The reward is limited to $11.70 and will be captured if the stock can rise above $400 by expiration.