Think A Consolidation Is In Order? This Diagonal Put Spread Can … – Investor's Business Daily

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Netflix (NFLX) pulled back sharply following last week’s earnings announcement. But it’s still holding above the 50-day moving average. Traders that think Netflix stock will consolidate around this level could look at a diagonal put spread.
The diagonal put spread is an option strategy that uses different strike prices and different expiration dates on the option chain. These are found diagonal from each other on an option chain, hence the name. We’ll sell a put at the near-term expiration with a higher strike on Netflix stock while simultaneously buying a put at an expiration date further out at a lower strike.
This is an advanced strategy because the different expirations will impact the option prices differently.
Here’s how to flesh it out for Netflix stock:
Selling an Aug. 18 put with a strike of 400 brings in a credit of $4.15. Buying a Sept. 15 put with a 380 strike costs $4.60.
The net cost on this Netflix stock option spread works out to $45.
The $45 cost is also the max loss for the trade on the upside.
But the downside risk is larger. If Netflix stock falls, that’s where you could be looking at the maximum loss of $2,045. This is calculated by taking the difference in the spread of the strikes (20) multiplied by 100 and adding in the cost of the trade (45).
The maximum potential gain is around $600, which occurs if Netflix stock closes right at 400 on Aug. 18. In that case, you get to keep the entire short put credit of $430 plus your long put will still have value with another month until expiration.
The trade has a nice profit zone in between 390 and 450. So a consolidation of gains for Netflix stock at its current level works for the trade.
Please remember that options are risky. 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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Authors may own the stocks they discuss. The information and content are subject to change without notice.
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