July 21st, 2023
And Just Like That, It’s Gone
It’s one of my favorite movie quotes, but instead of Verbal Kint in The Usual Suspects, I’m talking about the tech rally and positive market sentiment around earnings.
We’ve been talking about pullbacks for some time now, so it shouldn’t come as a surprise, but it was amazing to see how quickly things fell apart after tech darlings, Tesla (TSLA) and Netflix (NFLX), mentioned those dreaded words…
Tesla (TSLA) and Netflix (NFLX) were mixed regarding their earnings announcements, but the only words the market heard were about lower 3rd quarter guidance, in other words, they are projecting a slower 3rd quarter than what analysts expected.
As I wrote about yesterday, NFLX found more subscribers than estimated with their crackdown on password sharing. This means a potential for future revenue, but the worry is that the writer and actor strike will leave them with less content and therefore less reason for subscribers to stick around next quarter.
The other concern is that some users will jump from the higher tier ad-free version to the lower cost, ad-supported version.
Whatever the reason was – maybe it was profit taking too – NFLX sold off. Since they are one of the higher weighted stocks in the major indices, we saw the market come down with Netflix.
Tesla (TSLA) didn’t help anything either.
Earnings season is in full swing, but we will get a break from some of the bigger names today. We will get an opportunity to digest the news and see if more pain is ahead or if the run to defensive sectors will stick around longer. My guess is that the selling will continue for a few more days, but don’t expect the market to fall apart.
NFLX and TSLA will both survive and this may give you a better opportunity to enter trades for the longer term.
Today’s trade is on Copart (CPRT).
The stock has been traveling higher all year, at a 45-degree angle going from the bottom left of the chart to the upper right. The stock hit some resistance at $95 and has been pulling back from the high for 4 straight days. This has helped raise the put option premiums.
The trade is a simple put credit spread. I’d look to sell the 18 AUG 90 put while simultaneously selling the a8 AUG 85 put. This spread is going for 0.90 – 1.00. I wouldn’t take less than 1.00 for this spread, especially since the current price is only $1.21 from the strike I’m looking to sell.
That said, what if the market continues to sell off over the next few days?
We could look at what the spread would give us in credit if CPRT fell another 0.50 down to $91. If that happens, the same spread would give us an estimated credit of $1.12. If you’re patient and willing to miss a trade if CPRT doesn’t fall, I would put a GTC order for $1.12 and see if it will fill.
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Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab
Any trade or trade idea discussed is for educational purposes only. They will not be tracked as an official trade recommendation.
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