GOOGL Option Trade Has Zero Upside Risk, Solid Profit Potential | IBD

TL;DR

The broken wing butterfly strategy is a low-risk options trade designed to benefit from decreases in underlying volatility for Alphabet stock.

Transcript

foreign ERS it's Rachel with your option of the day for May 2nd for today's trade we're looking at a strategy known as a broken wing butterfly in Google parent alphabet so looking at it on Market Smith we can see that shares have been trading in narrow range below the five percent buy Zone from a 106.69 cup with handle by point Shares are holding s... Read More

Key Insights

• 🥳 Alphabet stock is trading in a narrow range below the buy zone and holding support above the 21-day moving average.
• ✳️ The broken wing butterfly strategy has no risk on the upside and limited risk on the downside, making it a favorable trade for Alphabet stock.
• 🤪 The strategy benefits from decreases in underlying volatility and can still be profitable even if the stock price goes down within certain limits.
• 😘 Risk management is important in executing the broken wing butterfly strategy, including setting stop loss and profit targets.
• 🤑 It is recommended for new options traders to practice with a virtual account before risking real money.
• 😚 Options trading can be complex, with the potential to lose 100% or more of the investment.
• 😘 The broken wing butterfly strategy can be executed using the June 16th expiration and specific strike prices for the puts.
• ™️ The ideal scenario for the trade is for Alphabet stock to stay between $102 and $108, with the maximum profit obtained at expiration around $105.

Questions & Answers

Q: What is the broken wing butterfly strategy?

The broken wing butterfly strategy involves selling two puts at a given strike price, while buying one lower strike put and one higher strike put. It is a low-risk options trade designed to benefit from decreases in underlying volatility.

Q: What are the potential risks and rewards of the broken wing butterfly strategy?

The broken wing butterfly strategy has limited risk on the downside, with a defined maximum loss. On the upside, there is no risk, and the trader can earn the biggest profit if the stock closes right of the short put strike at expiration.

Q: How can the broken wing butterfly strategy benefit from decreases in underlying volatility?

This strategy can benefit from decreases in volatility because the trade will make a profit even if the underlying stock price goes down, as long as it does not stray too far from the short strikes.

Q: What is the recommended risk management for the broken wing butterfly strategy?

It is recommended to set a stop loss if the stock breaks below a certain level and have a profit target in mind. In this case, a stop loss below $102 and a profit target of 10 to 15 percent could be considered.

Summary & Key Takeaways

• Alphabet stock is currently trading below the buy zone and has been holding support above its 21-day moving average.

• The broken wing butterfly strategy involves selling two puts at a given strike price, buying one lower strike put, and one higher strike put.

• This strategy has limited risk on the downside and no risk on the upside, making it an attractive trade for Alphabet stock.