Example Divergence Trade: Netflix (NASDAQ: NFLX)

Here’s a divergence trade I took last week in $NFLX, using the Multi-Divergence indicator in my trade plan. 

The setup: NFLX announced earnings on Oct 16.  Price made an all-time high.  I looked at the chart and saw a big divergence on the volume-weighted MACD.  The last big divergence in June led to a big drop. So I was looking to get in a bearish position. 

The candle on Oct 17 is the most recent bar on this chart. I saw that the bar had made the all time high and then fallen down below the prior day’s close, which I took as my bearish entry signal with NFLX at $200. 

The plan: $190 looked like a possible support, and a return to $204 would tell me my timing was wrong. I thought this move should happen in the next few days, so I bought the Nov 3 weekly options 197.5/195 put spread for $0.97.  I chose the 197.5 strike instead of the at-the-money 200 strike because it had higher gamma—it would have a larger change in delta with movement if I was right.  If the move didn’t come in the next day or so, I would get out and move on. 

I didn’t have to wait long:

The day ended red and had a good follow through day next. When the 190 support was nearly hit, I went to take profits. I sold for $1.57, which is a return of about 62%.  I love it when a plan comes together (extra Hannibal).

Note that the divergence indicator wasn’t the entry signal—it just provided context to give me an edge.  Divergences can often resolve with a continuation in the trend instead of a reversal. The context combined with the actual reversal behavior in the daily candles was what led me to take a trade. Always have a plan before you trade, and always follow your plan. My failures have come when I don’t do one or both of those things. 



Update to Apple Open Interest Chart

Here’s an update to yesterday’s open interest chart for AAPL. You can see that the calls had about a 1% drop in overall open interest yesterday, as AAPL charged higher:

Open interest decline would suggest to me that options writers wanted less exposure and bought to close them out. I don’t know if that is accurate, so somebody correct me if not. Another small datapoint in the fade OI camp.

Options Open Interest Over Time

As I’ve been collecting data from the OCC, I’ve created a database of the daily open interest numbers in all calls and all puts for each of the S&P 500 names. Now that I’ve got almost a months worth, here’s a couple of charts I found interesting. These show the open interest numbers for the September expiration, coming up this Friday. The first is for AAPL, which shows call OI accelerating over put OI over the last few days:

Compare that with the daily chart over the last 30 days, which has steadily fallen:

The next is for GOOG, and it shows that call and put OI’s crossed over at the end of August:

At the same time, GOOG was trending upward:

As with all data mining, I’m scratching my head to figure out what it means and if there’s any alpha there. It looks like you would want to fade the increases in OI from these charts. Leave a comment if you have any ideas of the meaning of these charts or other data that would be useful to mine out.