Shopify (SHOP) stock is sitting near all-time highs while showing improving relative strength.
Today, we are looking at a strategy that has the potential to generate a healthy return provided SHOP stock stays above 1,430.
The strategy is called a broken wing butterfly, and we will use puts because the strikes will all be out-of-the-money. Doing this minimizes assignment risk.
The wings are placed an equal distance from the short strike for a regular butterfly trade.
We leave a larger gap on a particular side with a broken wing butterfly. As a result, broken wing butterflies have less risk on one side and more risk on the opposite side.
Let’s look at how we can set up a broken wing butterfly trade on SHOP stock.
- Buy 1 July 16, 1440 put at 39.85
- Sell 2 July 16, 1430 put at 35.85
- Buy 1 July 16, 1410 put at 29.10
Notice that the upper strike put is 10 points away from the middle, and the lower put is 20 points away.
Option Trade On Shopify Stock Generates $275 In Premium
This broken wing butterfly trade will generate $275 in premium.
If Shopify stock stays above 1440, all the puts expire worthless, and the trader keeps the $275 premium.
On the downside, the maximum loss can be calculated by taking the width between the first two strikes (10) multiplied by 100 and subtracting the premium received (275).
That gives us 10 x 100 — 275 = $725.
The maximum gain can be calculated as 10 x 100 + 275 = $1,275. The ideal scenario for the trade is for SHOP stock to stay above 1,430.
As the trade starts with a delta of 3, this strategy is a bullish strategy. The initial exposure is roughly equivalent to owning three shares of Shopify.
Shopify Stock Trade Stop Loss
A broken wing butterfly could be an excellent way to trade SHOP stock for those with a neutral to bullish outlook. I would set a stop loss of 20% of the capital at risk (0.20 x 725 = $145) or if Shopify stock broke below 1,430.
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Please 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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View more information: https://www.investors.com/research/options/trading-a-broken-wing-butterfly-in-shopify-stock-can-give-you-1275/