From a prime commercial ad spot during the Super Bowl to this year's star diabetes solutions and glucose monitoring systems, Dexcom returns to my list of stocks that have been excellent to trade using options.
Still caught in a wide performance range, it is beginning to show signs of price improvement. In times past, we have used the short iron condor or the short put. But today, we will use a butterfly trade that expires in April.
Dexcom sits with a Composite Rating in IBD of 96, ranking second in its industry group according to IBD Stock Checkup.
The chart is basing nicely above 100, so that is the level we will watch to hold to keep this trade in good shape over time.
The trade is a long call butterfly with a premium debit of 0.35. This is how it's set up:
- Buy one Dexcom June 16 monthly 110 call
- Sell two Dexcom June 16 monthly 115 calls
- Buy one Dexcom June 16 monthly 120 call
The total cost is $0.35 per share.
The total risk is $35 per long call butterfly for a block of 100 shares, and the maximum reward is $465.
The break-even price is $110.35. The maximum profit will be attained if on June 16 the price of the stock is at 115 or lower.
The butterfly will be worthless if on June 16 the price of Dexcom stock is less than 110.
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The daily DXCM chart shows that shares sit in a sideways trend, caught between 100 and 122.
This Strategy Works Well In Upward-To-Mixed Trend
The long call butterfly (so called because of the two strikes in the middle and one strike on either end) is a limited risk exposure with excellent reward. But it requires the stock to move within a specific range. Based on the strikes I chose here, our ideal scenario will be a choppy trading range near 115.
Trade Exploration & Rationale
Identify the key chart levels for Dexcom stock.
Congestion exists between 105 and 120.
Scenarios For Dexcom Options Trade
What could happen:
- The stock moves within and potentially beyond the range but returns to rest at 115 by expiration, yielding the full profit.
- The profit region will be at its peak before expiration if the prices spike to 120 before June begins. And this could easily triple in price as it gets closer to expiration and the stock holds the 115 range.
- The stock moves back below 110 and the butterfly begins to fade dramatically. In this case consider a stop loss of 0.19 — more than 50% of the exposure but not much more.
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 Twitter and Stocktwits at @AnneMarieTrades
