Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Option Trading: Using Butterfly Positions in Amazon to Gain Profits


The broken-wing butterfly position is a great way to play potentially volatile earnings, especially if there are options set to expire in the next day or two.

In the OptionSmith portfolio I have been messing around in Amazon (AMZN) over the past few weeks keeping a basically bullish bias through some combination of bull call spreads and bull put spreads (credit) in the February 18 expiration. The core position has been long the Feb. $190/200 call spread and we've done some toggling back and forth between selling out-of-the-money put spreads on moves below $186 and selling out-of-the-money call spreads on moves above $192 a share.

That worked fine on the notion of milking some premium out of the stock in what I felt would be relatively range-bound ahead of the upcoming earnings report; the effective cost basis of the $190/200 call spread is now down to a mere 30 cents.

But now with earnings set to be released on Tuesday, January 31, I've gone looking for positions that offer not only bigger protection but much bigger potential profits. I'll be using butterfly spreads. I bring this up because I think these are very attractive standalone positions-meaning no need for prior involvement to establish these and hopefully profit. Here is an example:
  • Buy to open 5 February $175 puts (AMZN120203P0017500) at $1.55 a contract
  • Sold to open 15 February $165 puts (AMZN120203P0016500) at $0.50 a contract
  • Bough to open 10 February $160 puts (AMZN120203P0016000) at $0.30 a contract
This is a low-cost of just 65c per 1x3x2 spread. So a 5x15x10 costs $325. That represents the maximum loss if shares are above $175 or below $160 on next week's expiration. The maximum profit is if Amazon shares are at $165 on expiry this Friday, Feb. 3. In which case the position would be worth $10 or $4,675 for a 5x3x2 position. A nice 285% gain.
Don't be afraid to look at similar strategies to the up side. A call bull butterfly could be set up in the February weeklies using the $210/220/225 on a 1x3x2 construction for a mere $0.90 net debit. So a 5x3x2 costs $450 which is also maximum risk for prices above $225 or below $210. Max profit is $9.10 or $4,550 on a 5x15x10 position.
This skip-strike or broken wing butterfly position is one of my favorite ways to play potentially volatile earnings, especially if there are options set to expire in the next day or two. The OptionSmith portfolio has had some nice success recently in Google (GOOG) as a bear butterfly landed at $585 and more than saved the losses on the long call portion of the position. And I've heard from a few subscribers in the past two days who, on their own, applied this strategy to Apple (AAPL) ahead of earnings and enjoyed some multi-baggers.
Give it a try. You know what you have to lose. And it's only a little.

For more from Steve Smith, take a FREE 14-day trial to OptionSmith and get his specific options trades emailed to you along with exclusive access to his full portfolio. Learn more.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos