Trading A Broken Wing Butterfly In Netflix Stock

Investors2021-05-24

Netflix stock is struggling to break above 500 and is currently below the 50- and 200-day moving averages.

Today, I want to look at a strategy with very low risk on the upside and a healthy profit zone on the downside.

The strategy is called a broken wing butterfly, and we'll use puts because the strikes will all be out-of-the-money. 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.

Netflix Stock Broken Wing Butterfly

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

  • Buy 1 June 18 475 put at 6.25
  • Sell 2 June 18 450 put at 2.60
  • Buy 1 June 18 400 put at 0.85

Notice that the upper strike put is 25 points away from the middle put and the lower put is 50 points away. This broken wing butterfly trade will cost $190 to open, and this is the maximum risk on the upside.

The worst that can happen is all the puts expire worthless and the trade loses the $190 premium.

On the downside, the maximum loss can be calculated by taking the width between the first two strikes (25) multiplied by 100 and adding the premium paid (190).

That gives us 25 x 100 + 190 = $2,690.

The maximum gain can be calculated as 25 x 100 - 190 = $2,310

The ideal scenario for the trade is that Netflix stock stays flat initially and then slowly drifts lower to close around 450 at expiration. The total profit zone is between 427 and 472.

Trade For Those With Bearish Outlook On Netflix Stock

Because the trade starts with delta of -7, this strategy would not be appropriate for bullish traders. The initial exposure is roughly equivalent to being short seven shares of NFLX stock.

For those with a slightly bearish outlook, a broken wing butterfly could be a nice way to trade Netflix stock.

In terms of risk management, I would set a stop loss of 20% of the capital at risk (0.2 x $2,690 = $538), or if Netflix broke below 425.

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.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

  • e13v3n
    2021-05-25
    e13v3n
    very creative.. should hv illustrations to visualise
  • Ivylow
    2021-05-25
    Ivylow
    ?
  • Gaik11
    2021-05-25
    Gaik11
    Okay
  • Kayabunz
    2021-05-25
    Kayabunz
    ;)
  • Liviachia
    2021-05-25
    Liviachia
    I love Netflix :)
  • Firework peh
    2021-05-25
    Firework peh
    thanks for the education 
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