As health care continues to heat up, investors are focusing on Insulet after the company joined the S&P 500.
This often leads to several institutions picking up the stock, as mandates to buy for many portfolios based on the S&P 500 are triggered.
Health care services and health-related stocks continue to show strength in the market. Investors are looking to the more defensive sectors as mixed news about the economy and business strength comes across the wires.
With an excellent 97 Composite Rating, PODD stock joins peers Lantheus and Dexcom as leaders in the medical products group. The group ranks in the top 10 among the 197 industries IBD tracks.
Last quarter's earnings surprise for Insulet was a whopping 218% above views, and the stock sits near its all-time high. Its Relative Strength Rating is 93, and after a tough time in 2022, the chart appears poised to deliver stellar returns.
Option Trading: Butterfly Using Calls
The trade is a long call butterfly with extended duration expiring in September. This gives the chart a chance to fade and hold within a solid range, and then advance as the mandate to acquire the stock forces buyers into larger positions over time.
This trade is a neutral to bullish position and anticipates the stock holding above 330 over the summer months.
- Buy to open 1 PODD Sept. 15 monthly 330 call
- Sell to open 2 PODD Sept. 15 monthly 340 calls
- Buy to open 1 PODD Sept. 15 monthly 350 call
Total debit outlay is $0.45 per butterfly, and since this is a debit, this becomes our total risk for holding the position.
The potential high profit line for this options position is calculated the following way: The difference between the strikes of the long call spread (330-340) minus the cost of the butterfly ($0.45). That works out to $9.55.
Option Trading: Understanding The Call Butterfly
This is a neutral to bullish strategy that uses four options contracts with the same expiration but three different strike prices:
- 1 call at a higher strike price
- 2 calls at a midline strike price
- 1 call at a lower strike price
It is called a butterfly because of the fat middle (holding twice as many strikes) and the "wings" on either side.
Butterflies are very powerful trading instruments. When they are managed well, they reap high returns. They will work in areas of low volatility with a grinding within a range for an extended period of time, or high volatility when sharp spiking that doesn't break through the middle of the butterfly strike.
The stock market currently sits in a unique position, with a low volatility in the VIX but underneath, the volatility of volatility (measured by the VVIX) is beginning to rise.
If a trade is inexpensive, there is a trade-off. Holding to expiration as the price continues to rise will likely eat into the total profit, so managing the trade is a little different with butterflies.
Option Trade Management
The biggest plus in our favor for this trade is how inexpensive it is and the opportunity for very high reward.
Identify the key chart levels.
Support exists at the 300 level. Our premise is that this chart might fade because it is near new highs. So we want to give it time to pull back a bit and not affect the value of our option investment.
Scenarios For PODD Option Trade
What could happen:
- The stock moves into the middle strike of 340 and it stays close to this number but not over it by expiration. In this scenario we make the full profit of $9.55, less commissions.
- The stock moves to the highest strike we purchased and moves higher, so we take a loss of the entire amount of $0.45 plus commissions.
- The stock moves into our midline of price at 335. This will mark the ideal profit line as we move into the end of the summer. The position will likely be worth somewhere between $2.50 and $3 — and we exit the trade.
As a side note, you can also do this on the put side in case you suspect a fade in price might be something you wish to capitalize on. The concept will be the same.
What To Do If Trade Behaves Poorly
I do not often hold a stop on my butterflies. If the chart ends up not moving, or begins to behave poorly, I will sell another short call spread at my strikes and create a positive event out of the trade, always with an eye on risk.
It is for this reason that butterflies, though a bit more of a trading event, are well worth learning.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
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
