Airbnb experienced a strong bounce in the last month, moving from just above 80 to 110. This butterfly options trade on ABNB stock profits if it pulls back to 100 over the next 10 days.
Why A Butterfly Trade Makes Sense For ABNB Stock
On the positive side, ABNB stock closed above the 200-day moving average last week. But it only remained there for one day. Yesterday, the stock was down 5.6%. It's tough to be bullish on ABNB stock given its poor relative strength in the last 12 months. But travel stocks have improved including airlines, hotels, casinos and booking sites.
If ABNB stock finds that resistance at the 200-day line sticks, it may come back down toward the 50-day moving average in the next week. Here's a directional butterfly, centered at 100, with the view that ABNB stock might retrace to that level.
A butterfly is a limited risk and limited profit trade. On a typical butterfly trade, the profit potential is higher than the potential loss. In this example with ABNB stock, it's a lot higher.
Setting Up The Butterfly Trade
Butterfly spreads involve three different option strike prices, all within the same expiration date, and can be created using either calls or puts. As we are placing the butterfly below the market, we will use puts in this case to reduce the risk of early assignment.
Placing the trade out of the money on ABNB stock means it can be done for very low cost with a large profit potential.
Here's the trade I'm looking at:
Buy one Feb. 10, 95-strike put @ 0.30
Sell two Feb. 10, 100 puts @ 0.80
Buy one Feb. 10, 105 put @ 1.95
That makes the total cost of this butterfly trade on ABNB stock pretty low at $65. That's also the maximum loss potential on the trade.
The maximum gain is $435. That calculation takes the difference in strike prices less the premium paid ($500 less $65).
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If ABNB stock doesn't get down to 100, I lose a little bit, but have the potential for a large payoff if it does hit 100 in about 10 days time.
For a trade like this, it either works or it doesn't and I'm prepared to lose the $65 if it doesn't work out.
Update On Previous Trades
This bullish diagonal spread trade on Visa can be closed for a profit. This long straddle on Walmart triggered its stop loss.
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
