Option Trade: How To Profit Off Sideways Action In Stocks With A Butterfly Spread | Summary and Q&A

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November 24, 2021
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Investor's Business Daily
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Option Trade: How To Profit Off Sideways Action In Stocks With A Butterfly Spread

TL;DR

Learn how to profit from Xilinx stock consolidating through a butterfly spread options strategy.

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Questions & Answers

Q: What is a butterfly spread options strategy?

A butterfly spread involves buying one in-the-money call, selling two at-the-money calls, and buying one out-of-the-money call. It profits when the stock stays within a defined range with a drop in implied volatility.

Q: Why is Xilinx an ideal candidate for a butterfly spread?

Xilinx currently has a high implied volatility percentile of 98, making it suitable for a butterfly spread. High implied volatility means higher option premiums, which benefits the strategy.

Q: What is the maximum loss and maximum gain of the butterfly spread in Xilinx?

The total cost of the trade is $155, which is also the maximum loss potential. The maximum gain is calculated by taking the difference in strike prices minus the premium paid, resulting in $845.

Q: When should one consider holding the butterfly spread until?

It is advisable to hold the butterfly spread until close to its expiration date to maximize potential profits. Achieving the maximum profit is rare, but the trade's risk-reward ratio is favorable.

Summary & Key Takeaways

  • Xilinx stock has been rallying but may need to consolidate before the next leg of its rally.

  • A butterfly spread is a strategy that profits when the stock stays within a defined range with a drop in implied volatility.

  • The trade involves buying one in-the-money call, selling two at-the-money calls, and buying one out-of-the-money call.

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