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Well, the market rally from last week was short-lived, and the S&P 500 took a hit right up until open on Monday, down about 12% from the start of the year.
If you read the headlines, it seems like the dip is across the board, touching basically every sector of public trading. Tech, commodities, infrastructure - you name it, it's going down.
And nothing went over the proverbial cliff faster than Netflix Inc. (NASDAQ: NFLX). The company reported results for the first quarter that missed various estimates, and the stock dropped nearly 40% before rebounding slightly in early Friday trading.
That's what I call a serious beatdown. But as with all such sharp market movements, we can use it to our advantage.
Sometimes, the best short-term trades are simply a matter of going against the grain.
When everybody is on one side of a trade, there comes a point when the best risk/reward scenario comes from betting against the herd.
Legendary investor Jim Rogers compares this to everyone getting on one side of a boat. When that happens, he says you probably want to be on the other side of that same boat...
Or risk getting dumped in the water as the boat tips.
In this case, what we're looking at with Netflix is an overreaction that gives us a chance to score some profit as it rebounds. Let me show you how to play it...
The Boat Is Tipping
For the quarter, Netflix reported revenue increased nearly 10% to $7.87 billion, but the stock dropped 40%.
Net income during the quarter fell 6.4% to $1.6 billion, and the stock dropped 40%.
Excluding items, the company earned $3.53 per share, well above the $2.89 per share analysts had expected, but the stock still lost 40% in two days.
At issue was that the company reported losing 200,000 subscribers during the first quarter, its first decline in paid users in more than a decade. Additionally, the company is forecasting a global paid subscriber loss of 2 million for the second quarter.
Even if the company does lose 2 million subscribers, that's less than 1% of the company's 220 million paid subscriber base - and the stock lost 40%.
I'm not saying NFLX isn't in trouble, but a 40% haircut is way overblown.
Clearly, the majority of investors are on one side of the boat, and I think we could see a short-term bounce to the upside.
At this point, let's buy the NFLX June 17, 2022 $225/$230 call spread for $2.25 or less. Plan on selling the NFLX June 17, 2022 $225/$230 call spread for a 100% profit or if shares of NFLX close below $210.
This Streaming Service Could Ride the NFLX Bump
I'm also watching Roku Inc. (NASDAQ: ROKU), another streaming provider.
If we see any rebound in shares of NFLX, we could easily see a rebound in ROKU, which is trading just above recent support at $97.90.
As with NFLX, I'm not saying the ROKU is a great long-term investment. I'm just saying the NFLX effect feels overblown, and we could see a pop to the upside as bargain-hunting traders move in to make a quick profit.
At this point, I like buying the ROKU June 17, 2022 $105/$110 call spread for $2.25 or less. Plan on selling the ROKU June 17, 2022 $105/$110 call spread for a 100% profit or if shares of ROKU close below $97.
As I mentioned at the top, bottom-fishing, like I am recommending today, can be risky.
There's no guarantee NFLX or ROKU are going to rally. Make sure you don't allocate any more than 1% of your trading capital to either of these trades, and make sure you exit if NFLX or ROKU close below $210 or $97, respectively.
It's more important than ever for investors to find solutions that can help counteract the volatility we've seen this year. As interest rates rise and the market teeters, banks are one area where investors are taking refuge.
But we've identified two other key market sectors where a new flood of buying is going to create opportunities for potentially massive profits, especially in small-cap stocks that often get overlooked by the major players.
I have a strategy to narrow thousands of these stocks down to the few with the biggest potential to be the next market winners.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.