Icahn Lights A Fire Of Hope Under Netflix
Dr. Duru | Nov 01, 2012 03:40AM ET
Suddenly, I have to take an acquisition of Netflix (NFLX) a little more seriously.
At the end of October, iconic deal shaker and maker I thought that buyer would be the CEO himself, Reed Hastings . Icahn certainly works just fine for now.
This week’s hurricane-related two-day market closure left me with fewer days than I expected to work my positions in the weekly options that hedged my short call spreads (Nov 70/75s left over from a NFLX earnings-related trade). When NFLX gapped down as the latest M&A rumors failed to generate anything real over the weekend, I got ready to dump my weekly Nov $70 calls and cash in on the weekly Nov $62.50 puts.
I expected the stock to collapse quickly under this scenario. However, the calls had quickly lost all their gains from Friday, so I froze. As NFLX recovered, the calls soon recovered most of Friday’s gains.
As the stock stalled, I sold those calls: I figured I had to make a decision today otherwise time decay would significantly erode value overnight. I used part of the profit to move up the weekly Nov $75 calls. While I lost profits on the gap in value between the $70 and $75 calls, I was of course relieved that I did not get over-confident about the waning viability of the short call spread position. However, it also did not occur to me to set a limit order to sell the calls, so I missed the NFLX prints above $80.
With the overall position well in the green now, I will sell the $75 calls on Thursday and just ride out the short call spread to expiration. The great benefit of shorting a spread is that the losses are capped.
My primary lesson from this experience remains that I need to stick to my post-earnings trading rules that compel me to close out profitable positions as quickly as possible. If I had done that, my subsequent trades would have been greatly simplified. The secondary lesson is that it pays to respect stock action. If I had not taken it seriously, I would have missed out on a great opportunity.
Finally, it seems again there is some potential in calendar spreads that use the premiums from shorting monthly spreads to fund directional bets on weekly options.
Be careful out there!
Full disclosure: long NFLX calls and puts
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