Transportation has rallied nicely since January, and FedEx stock moved along with the sector. But if you think the upswing is due for a break, this broken-wing butterfly option strategy has a neutral to bearish outlook.
FedEx stock showed a bearish shooting star candle on Wednesday. After its impressive rally, and IBD’s market outlook moving to uptrend under pressure, some sideways action could be in order.
Broken-Wing Butterfly In FedEx Stock
An option trade idea that will profit if FDX stock stays below 320 is a broken-wing butterfly.
This broken-wing butterfly with calls has limited risk and works if you have a neutral to slightly bearish outlook on FedEx stock.
The catch is that there is risk on the upside if FDX stock makes a big move higher, especially if it does so early in the trade. Bullish traders wouldn’t enter this trade.
Let’s take a look at how a broken-wing butterfly trade might be set up on FDX stock.
Buy 1 June 18, 300 call at 15.55.
Sell 2 June 18, 310 call at 10.20.
Buy 1 June 18, 330 call at 3.85.
Notice that the lower strike call is 10 points away from the middle call and the upper call is 20 points higher from the middle call. That difference in the distance of the strikes is what separates it from your regular butterfly option. It ends up bringing in a net credit, so you would collect roughly $100 in premium.
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Profit And Loss Scenarios
So how do you profit? If FedEx stock ends below 300 at expiration, all the calls expire worthless. The trader keeps the $100 premium.
The maximum loss occurs if FedEx moves up strongly. It can be calculated by starting with the difference between the first two strikes at 300 and 310. Multiply that by 100 and subtract the $100 premium received. That gives us 10 x 100 – 100 = $900
The maximum gain can be calculated in a similar way. In this case, you add the premium received. That gives us 10 x 100 + 100 = $1,100. You would need FedEx to close right at 310 at expiration to achieve the maximum profit.
The ideal scenario for the trade is that FDX stays below 310 until expiration.
The risk on the trade is that FDX shoots significantly higher, particularly early in the trade.
For those with a neutral to slightly bearish outlook, a broken-wing butterfly could be a nice way to trade FedEx stock with a lot of ways to end up a winning trade.
It’s important to 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.
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
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