Booking, a major play in the travel and leisure space, rallied past 4,000 recently and finished at a closing high on Friday. The megacap consumer spending play is lagging the major averages year to date, up just 13.5%, yet it has spurted 159% from its 2022 low. Hence, today's column showcases a unique butterfly spread trade in BKNG stock.
As earnings season begins under the low-volatility regime of the Cboe Market Volatility index, or the VIX, we use this backdrop to find opportunities to gain money by stacking the odds in our favor. The VIX measures the 30-day implied volatility of options tied to the S&P 500.
BKNG Stock Today And Volatility
When the VIX is extremely low, three things generally occur. One, we are more inclined to clear gains when selling option strikes. Two, we expect to experience large drawdowns if the charts go against us. And three, we can witness the slow death of time decay if we buy the options outright. However, risk expands when news or any other catalyst wreaks havoc on prices.
Enter the unbalanced double butterfly. I want to remind readers the premise for working in the market: to position ourselves in the case of the "obvious" move, yet also prepare for a possible outsize move.
With earnings expected for Booking on Aug. 1, we have the catalyst we need. And, we have a fair bit of implied volatility in the option chains. This gives us the ability to position for an outsize move that could occur while still delivering a credit if the chart does nothing.
This position will require some margin. Why? Every credit implies some downside risk is present in the chart.
Setting Up The BKNG Butterfly Spread
Let's look at the trade structure for a long unbalanced double butterfly for BKNG stock:
- Buy to open one BKNG Aug. 16-expiration call with a 4,050 strike price
- Sell to open two BKNG Aug. 16. 4,100 calls
- Buy to open one BKNG Aug. 16 4,200 call
The trade delivered a credit of $10.20 per set of contracts, or $1,020, based on recent trading. This creates a maximum profit of $60.20, or $6,020 per set of contracts. The maximum loss is at $39.80 (outside of commissions).
Total profits will begin to erode if BKNG stock stays above 4,100.
Butterfly Spread, Part II
Here's the second setup in BKNG stock:
- Buy to open one BKNG Aug. 16 put with a 3,860 strike price
- Sell to open two BKNG Aug. 16 3,800 puts
- Buy to open one BKNG Aug. 16 3,700 put
The put butterfly will deliver a credit of $6.50, based on recent trading. This creates a maximum potential profit of $66.50 ($6,650 per set of contracts). The max loss stands at $33.50 (outside of commissions). Total profits will begin to erode if Booking stays below 3,800. Please note the difference in price distance from the middle strike and the lower and upper ones. This is what makes the butterfly unbalanced.
There is no break-even price per se, as you receive the credit for holding the risk. This makes the spread sometimes difficult to fill because the market maker will have to possess other positions in their book that might make it favorable to hold our position.
The strategy gives us four choices to exit the trade. First, sell both spreads right after earnings. That's when the volatility crush will affect the options positively. Second, sell the spread once it hits your loss threshold as determined by personal risk. This would likely happen with extreme movement in BKNG stock itself. And third, sell the spread into the week before expiration, if all is going well. I have had many a trade go sideways while taking it down to the wire and not capturing gains.
Defending The Trade In BKNG Stock
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
The goal of taking on unbalanced butterflies? Take advantage of higher implied volatility into earnings, giving us more opportunities to earn a credit and participate in an outsize move. This makes the position quite unique. Also, we sell strikes further out to finance our position.
Let's now identify key chart levels in BKNG stock. The monthly upside resistance zone sits right around 4,040. The support sits near 3,850, which should bring buyers to the chart.
Scenarios For Double Butterflies
- BKNG stock moves wildly outside of the range of the butterflies. The options loses much value.
- BKNG sits in its current range after earnings. We hold the trade until the week before expiration, then close it out, keeping all or most of the credit received.
- The stock rises into either of the middle strikes. We close the position at the test of the middle strike price to collect gains.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully. Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on X at @AnneMarieTrades
