Netflix price drops 13%. Now what?

Happen to Netflix. As you probably know, when earnings were released a few days ago, there was a huge gap down that you can see here in this chart. And we may use the tradingviews tool to quantify the drop. Okay, so if we connect this point to here where it closes more than 13% drop. So what happened? Actually, as you probably know, when earnings are released, there may be volatility in the market. And that's what happened here. Now if you click here very interestingly, you will see that estimates were 0.57 and the earnings was 0.60. So it was larger. So you may wonder why gap down if earnings were better than estimate? Well, is not easy. I would say that because earnings are better than estimates, this doesn't mean that there will be a gap up because maybe yes is better than estimates, but people expected even more. Now if you look at the news to understand what was going on, that is what usually people do after an event like that. Then you may start to find things like, okay, the earnings as we said were better, but the revenue not as much. In terms of subscribers, there was a drop. And if you look at other articles like this one, basically what they say is that Netflix increases the prices of the subscription, but the number of customers were going down. This means that they hit a ceiling, right? So in terms of growth, if they keep increasing the prices, they will lose customers. So they reach a kind of maximum. Okay, so in terms of future projection, this is not really a good news. Now if you look at the chart here, there are a few considerations that we can do because of course it's very easy to comment after things happen right now you will find a lot of people that will tell you why the price drops. And I'm pretty sure that if there was a gap up, the same people will find other reason to say why the price gap up. So I would not really look at the news now. It's not really, really useful in my opinion. I think it's more useful to understand what you may do in situations like that before the event happen. So if you look at the chart, a few things we can notice. Number one, the price was near a resistance. You see there is this black line. It was it here once, two times again, three, four and five times. So if you enter around this point with the view, let's say of a long term investing maybe was not a good idea. And let's look at the historical earnings, you will see that in other situations like here in January 2018, there was a gap this time gap up. Sometimes not too much, but here there was another gap. So you see here of course it seems smaller, but since this is a green candle, it means that the price opened here that time. So it was closing here at what is that? Around 400. And then it opened at 340, 346, 347. And then it went up. Yes, but if you had a stop loss around here, it would have been triggered at this level. So from historical chart you can see that during earnings is not uncommon for Netflix to have gaps. So that was a first warning. What I will do next time? Well, it really depends if you are a trader or a long term investor. If you are a trader, my suggestion is close the position before earnings. Because you never know how people will react to the news of the earnings. You may get as in this case, better than estimate and still gap down. You may have worse than estimate and gap up. And this is particularly important if you are shorting. Because if you are going long, if you buy, then okay, you can lose more than what you expected with your stop loss, but you have a maximum loss that you can have if the price goes to zero, that's really the worst case. But if you are short selling, you don't have a maximum loss. So in that case it's even more important to close your position and you can buy back later if the price, if the chart is still behaving well. So if you're a trader, that is my suggestion, close your position before earnings. What if you are a long term investor? Well, in this case you have two options. Number one is if you are still confident about the company. And in this case, if you look at the fundamentals of Netflix in terms of earning per share and sales, they were pretty good, right? So it's not a bad company. But of course there are concern, as I said, about the customer, that they are losing share to the competitors. So in a long term perspective, you may also consider other things, right? For example, how they will do in one year, two years, three years, given the competition and other considerations. But earnings and sales were quite good. So again, if you are still confident that the company is good, what you can do is, number one, you just close your eyes and forget. Because if you have a well diversified portfolio, the other position in your portfolio should somehow hedge your loss. The second option is, especially if you have a large position in a company and earnings are coming and you are afraid, is to buy an insurance that in this case could be a put option. Okay? So if you're not familiar with options, you can find many videos online. I may make one to explain the basic concept, but basically if you buy a put option, you are making money. If the price drops, of course is not as simple as that. There are many other things to consider like the time expiration and the volatility. But the main idea is that if your long position lose money, at least you can hedge with the put option. So this is another option that you can consider in this case. So I hope this video is helpful and it will give you some idea, especially what to do not after this happen, but before. Because again, after the event everyone can tell you why it happened or what you should have done or this or that. But the real challenge is to be able to anticipate this kind of situation with a trading plan that is really taking to account all the possible scenarios. So thank you for watching and see you next time.