American Tower shook off a Wednesday-Thursday sell-off with a solid gain Friday. Trading near 234, the REIT (real estate investment trust) enjoys a nearly 38% gain from its April 30 low. So, today's column focuses on an option trade in American Tower stock that benefits from future volatility.
I suspect traders did a front-running of equity prices, including American Tower stock. And we are now seeing stocks pull back in the early days of the moves after the Federal Reserve's decision to cut interest rates for the first time in four years.
Since the central bank has sent the message that another half point in interest-rate cuts may be on the docket by the end of the year, we are essentially looking at a two-way market. Specifically, stock prices could rapidly accelerate or decelerate, depending on how market participants eventually digest the moves.
As for American Tower stock, clearly traders could see an uptick of action in the REIT and simply buy the dip. Or if they made a "buy the rumor, sell the news" play, we could see a fade into the support zones near AMT's breakout region near 210.
As always, we assume that we don't know the direction. Instead, estimate the magnitude of the move using the ATR (average true range) as measured on the weekly chart.
American Tower Stock Today
Trade structure involves a long call butterfly and a long put butterfly. First, let's set up the long call butterfly. We position it so the 'long wing' of the trade gives us a likelihood of returns. Use the short wing to finance part of the trade.
The long call butterfly combines a long call spread, a bullish position, with a bearish short call spread that shares the middle strike.
- Buy to open 1 AMT Nov. 15-expiration call with a 240 strike price
- Sell to open 2 AMT Nov. 15 250 calls
- Buy to open 1 1 AMT Nov. 15 260 call
The call butterfly above will cost approximately $0.78 (the maximum loss for this position), or $78 per set of contracts, according to recent trading. This makes the maximum profit $9.22, or $922 outside of commissions. Total profits will begin to erode if the price of American Tower stock stays above 165.
Calls And Puts
Next, the long put butterfly in American Tower stock gets positioned so the 'long wing' of the trade gives us a likelihood of returns. Use the short wing to finance part of the trade.
The long put spread is a bearish position; it and the bullish short put spread share the middle strike.
- Buy to open 1 AMT Nov. 15 220 put
- Sell to open 2 AMT Nov. 15 210 puts
- Buy to open 1 AMT Nov. 15 200 put
The put butterfly above will cost $0.50 (max loss) which makes the max profit $9.50. Total profits will begin to erode if AMT falls and stays below 210. If we take both sides of these trades, we will have a maximum exposure of around $1.28. This opens room for a profit all the way up to $8.72, or $872 per spread position.
The goal of taking the unbalanced butterflies like the one above? Take advantage of higher implied volatility as the undercurrent of markets shift to participate in an outsized move.
Identify Key Chart Levels
The relative resistance zone sits right around 240, which likely may bring in sellers if rotation continues. Therefore, evaluate the position at the test of 240. If it holds, we will see the BFRN (big fat round number) of 250 getting tested. Buying support sits near 210, evidenced by heavy buying near this region over many months.
The strategy result provides three choices to exit the trade.
One, sell both butterfly spreads once the middle strike of either spread is tested. We look at setting an alert for 240 and 250 to cover the long side. We also set an alert at 210. Why? We are looking for either butterfly to deliver the positive results we are looking for. Two, sell the spreads once it hits your loss threshold. This will happen with extreme movement.
Watch The Middle Strike Price Closely
Three, sell the first spread in American Tower stock that hits the middle strike. Leave the opposing spread alone to recover if market gyrations continue. Finally, sell the spreads into the week before expiration, if all is going well and you have decided to hold the trade closer to the expiration date.
Keep in mind that I have had many a trade go sideways down to the wire and not capture gains. So I do not advise this.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on X at @AnneMarieTrades
