The stock looks poised for a fall but what if it jacks up again? Seems too risky to play! The dilemma is how to directionally play high priced stocks without getting your face ripped off. My favorite speculative strategy is the directional Butterfly trade.
Trade: TSLA is around $246 (we got this from Dan at the close Friday, TSLA opened this morning at $242.70, down $3.51). If I think the stock can visit 230 sometime over the next 40 days, I might put on a cheap Bearish Butterfly. Using April Expiration, I would buy 1 April 240 put, sell 2 April 230 Puts and Buy 1 April 220 put. The total debit I’m looking to pay is around $80. If I did the trade twice 2-4-2, the cost would be $160. My total risk is the cost of the spread, or $80.
I’m looking to make at least 50% minimum on the trade. If I pay $80 for the butterfly, I want to sell it for at least $1.20 credit when I close the trade. This is a 42 Day trade, in 21 Days from now, if I was wrong, I would take off the trade if TSLA was above $265 . If TSLA is between 211 and 247 over the next 21 days, I could possibly make 30-55%.
Just a little bit on Risk Management. If only practicing small on these trades to get used to them, try to get a rate at your broker like $1.50 per contract or less and no minimum, important if you only trade 1-5 contracts when learning a strategy. Have a great week! Dan Sheridan