The technical case for shorting Netflix

It hasn't been a great year for Netflix. Even as the S&P 500 has risen 12 percent, Netflix is down nearly 9 percent in 2014. And technician Carter Worth of Sterne Agee thinks it will soon get even worse.

Worth says that Netflix shares have done what similar soaring stocks, such as Google, Priceline and Tesla, have also done of late: break a long-standing uptrend and break it hard.

Netflix has experienced "a clear break in trend, and that's how it starts," he said Friday on CNBC's "Options Action."

In addition, Worth notices a head-and-shoulders pattern on the chart, which indicates that a stock is reversing and headed lower.

At this point, the technician expects the stock to fall below the $315 level, where Netflix seemed to find support in the prior week, and back in late April and early May.

"The presumption is, we're going to break these lows, and break these lows hard," Worth said. "Short."

He expects the stock to fall to about $290, which would represent a 15 percent decline from Monday's opening price.

However, options expert Mike Khouw suggests a more nuanced strategy.

"You wouldn't want to short this thing, and the other thing you wouldn't want to do is just buy outright options, because they are a little bit more expensive," he said.

Instead, Khouw suggests buying the March 300/275 put spread for $6.00. This trade will make money if Netflix shares fall below $294 by March expiration.

Worth and Khouw previously suggested a bearish strategy on Netflix back in June, when the stock was trading at $430. The stock has indeed fallen dramatically since then, yielding big profits on the trade.


Follow the show on Twitter: @OptionsAction.

Contact Options Action

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.