Walking in this morning with the S&P 500 futures up 1%, approaching the previous all time highs, I was wondering just how much 2 high-flying stocks that I have bearish (defiined risk) options trades on would be up in the early going? The trades are in NFLX (here) and TSLA (here) and were constructed with the idea that they would not exactly be high probability trades, but if the momentum did shift in both in the coming weeks I had a very good chance to make multiples of the cash that I risked if the stocks were to test important recent technical support levels.
Let’s quickly look at NFLX, the 2 day chart shows a fairly silly opening pop of 1.4%, only to be the high of the day spending the rest of the day making lower lows, closing down 2.5% from the highs and down 1% on the day.
Looking at TSLA, this was the one that made me nervous, as the short interest of nearly 26% can cause desperate traders do crazy things when they are feeling the maximum amount of pain on opening gaps. The 2 day chart shows a modest open and then a quick surge higher (likely shorts covering) up more than 3%, only to make a series of lower highs and lows and to close up 60 bps on the day.
Whats this price action tell me?? Well to be honest not a ton other than these stocks on up days are more likely than not seeing shorts scramble to cover rather than finding new buyers with both stocks up hundreds of percent on the year (NFLX up 229% ytd and TSLA up 396% ytd).
For those of you who think I am trying to pick a top in the 2 high-fliers, I am not, I merely think the risk reward is far better at the moment to be positioned for a 10-20% sell off in each as opposed to a rally of the same magnitude, I willing to risk a little to possibly make a lot if I am right.