Asset 7
Asset 7

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The selected stock has been in a consolidated range of prices for some time and has recently attracted interest from investors who are anticipating the stock moving lower from this range.

When an underlying stock moves from a consolidated range of prices, it’s a great time to look at an asymmetric risk:reward idea like a “Butterfly”

Enter a Put Butterfly (Sell 2 puts at one strike price while simultaneously buying a single put at 2 other strike prices). To construct this position:

  • Current Stock Price: $X/share
  • BUY TO OPEN 1 PUT OPTION near current price
  • SELL TO OPEN 2 PUT OPTIONS at the projected target price
  • BUY TO OPEN 1 PUT OPTION beyond the projected target price
  • >> The resulting order contains 4 option contracts in total and is entered as a “debit” 

The max projected loss for this investment is the debit paid to enter the position.

The selected stock should continue to trade lower toward a projected target over the next couple weeks causing the credit available to grow and taking the investment into profit. An investor can close the trade for profit when the available credit is greater than the debit paid for it.

Once a stock begins its move toward the projected target, it should not reverse and close back above the initial price.