Earnings gaps to the downside can provide a significant amount of technical damage to stocks. This kind of damage takes weeks or even months to repair, and you can use this to your advantage in the options market.

After trading in a six-month range, NFLX had a massive gap down of over 100 points. Since then the sellers have cleared out, leading to a slow grind higher.

What we are seeing as an attempted gap fill, but as NFLX approaches the 400 dollar zone, odds are more sellers will come back in. Why? Because it was the lower end of the previous trading range and you will have market participants use those prices to sell in case the stock rolls over.

This is one trade where it doesn’t make sense to short the stock straight up. Instead, use the options market to your advantage.

By selling the NFLX Dec 430/435 bear call spread, you can profit as long as NFLX doesn’t rally further than 11% between now and Christmas. NFLX has seen that kind of movement in the past, but it doesn’t come after a nasty gap down on earnings.

The bear call spread is currently going for 0.67, which is too low. You want to employ a scaling approach here: enter the call spread sale for a credit of .70, then 1.20, then 1.80. By planning to scale in, you forego the risk of putting on too much directional exposure all at once.