A butterfly is a neutral, income-oriented strategy. It is a limited risk and limited profit trade. But on a typical butterfly trade, the profit potential is higher than the potential loss.
Butterfly spreads involve three option strike prices, all within the same expiration date. It can be created using either calls or puts.
A typical butterfly would be constructed as follows:
Buy 1 in-the-money call
Sell 2 at-the-money calls
Buy 1 out-of-the-money call
Setting Up Butterfly On Uber Stock
Today, we will look at an example on Uber Technologies
- Buy 1 Dec. 15, 45 call @ 5.45
- Sell 2 Dec. 15, 50 calls @ 2.10
- Buy 1 Dec. 15, 55 call @ 0.55
The total cost of this trade is $180, and that is the maximum potential loss.
The maximum gain is $320. It's calculated by taking the difference in strike prices less the premium paid ($500 less $180).
The breakeven prices are 46.80 and 53.20. (Calculate them by taking the lower strike plus the premium and upper strike minus the premium.)
A butterfly options trade risk graph has a tent-like shape with the potential for very large profits around the short strike. It's important to keep in mind that it's unlikely you would ever achieve the maximum profit.
Aim For 20% Profit On Uber Stock Trade
A good aim for a butterfly trade is to make a 20% return on capital at risk. In this case that would be around $90.
A good aim for a butterfly trade is to make a 20% return on capital at risk. In this case that would be around $90.
According to the IBD Stock Checkup, UBER stock is ranked number 1 in its group and has a Composite Rating of 92, an EPS Rating of 81 and a Relative Strength Rating of 96.
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.
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 Twitter at @OptiontradinIQ
