Tesla Stock Broken Wing Butterfly Can Net Nearly $1,000

Tesla (TSLA) has had a rough time lately, with the stock down 43% in the last three months.




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Today, I want to look at a strategy with no risk on the upside and a healthy profit zone on the downside.

The strategy is called a broken wing butterfly. We’ll use puts because the strikes will all be below the stock price. This helps to reduce assignment risk.

With a regular butterfly option trade, the wings are placed an equal distance from the short strike. But with a broken wing butterfly we leave a larger gap on a particular side.

This results in less risk on one side and more risk on the opposite side. 

Let’s take a look at how a broken wing butterfly trade might be set up on Tesla stock.

  • Buy 1 Dec. 16, 140 put at 3.15
  • Sell 2 Dec. 16, 155 put at 6.70
  • Buy 1 Dec. 16, 165 put at 10.50

Strike Prices Differ In Distance

Notice that the upper strike put is 10 points away from the middle put, and the lower put is 15 points away.

This broken wing butterfly trade will result in a net credit of $25, which means there is very little risk if Tesla stock bounces.

The worst that can happen is all the puts expire worthless, which would leave the trader with a $25 loss.

On the downside, the maximum loss can be calculated by taking the difference in the widths (5) multiplied by 100, plus the premium paid. That gives us 5 x 100 + 25 = $525.

Maximum Gain Nearly $1,000

The maximum gain can be calculated as 10 x 100 — 25 = $975.

The ideal scenario for the trade is that Tesla stock stays flat initially and then slowly drifts lower to close around 155 at expiration. The total profit zone is between 145 and 165.

The trade starts with delta of 2, so it has a slight bullish bias to start, but that will flip to negative delta closer to expiry if the stock is still above 165.

In terms of risk management, I would set a stop loss of 20% of the capital at risk, or if TSLA broke below 145.

According to the IBD Stock Checkup, Tesla stock is ranked No. 4 in its industry group and has a Composite Rating of 45, an EPS Rating of 75 and a Relative Strength Rating of 12.

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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