With the market looking strong but a couple of important news items on the horizon, traders wanting to take bullish exposure may want to think about doing so in a limited risk way.
One way to do that is via options, using a bullish butterfly spread.
Microsoft put in a strong candle yesterday and edged into a buy zone. Traders can gain some upside exposure in a low-risk way via a bullish butterfly.
Butterfly spreads involve three different option strikes, all within the same expiration date, and can be created using either calls or puts.
Microsoft Stock Trade Costs Little
By trading a butterfly with a bullish bias, we can place the trade cheaply and have a large potential payoff.
Assume we have a price target of 450 for Microsoft stock within the next few months. Let's look at how we can set up a bullish butterfly based on those parameters.
- Buy 1 July 19, 435 call @ 10.35
- Sell 2 July 19, 450 calls @ 4.30
- Buy 1 July 19, 465 call @ 1.45
This trade only costs around $320 per spread, but has a payoff potential much higher than that.
The ideal scenario is for Microsoft stock to be right around 450 at expiration on July 19.
The maximum loss on the trade is equal to the premium paid of around $320 per contract. This would occur anywhere below a Microsoft share price of 435 or above 465.
Max Profit On Microsoft Stock Trade $1,180
The maximum potential profit on the trade is $1,180. This is calculated by taking the width of the butterfly strikes (15) times 100 less the premium paid ($320).
Taking a low-risk trade like this can be one way to participate in any further rally without risking too much capital.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
