Apple reports next week and we are likely to see the stock trade in wider ranges. So, let's consider setting up a double butterfly formation in Apple stock.
Traders are likely positioning for ranges that are 12-points wide, based on the put and call prices at the money for Jan. 31 expiration.
That's a day after earnings. Like Netflix, I suspect the ranges in Apple stock might expand more than what traders have planned.
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Apple Stock: Long Double Butterfly
A double butterfly is ideal for larger anticipated moves into a catalyst, including earnings. This setup is a combination of a long call butterfly and a long put butterfly.
A long call butterfly combines of a long call spread and a short call spread that share the same short strike. A long put butterfly is the combination of a long put spread and a short put spread that share the same short strike. They are positioned as two separate trades.
For the long call butterfly spread (a trade positioned for upside), notice that this butterfly below will deliver returns even if the chart expands to numbers much higher than 255. The reason? We capture $1,500 on the long side from 235 to 250, and only give back $500 if the price of Apple stock moves up to 250 and past 255.
This leaves us with $1,000 as maximum profit, less the current cost of $196 to set up this trade. Here's the setup in Apple stock:
- Buy to open 1 AAPL Feb. 21 call with a 235 strike price
- Sell to open 2 AAPL Feb. 21 250 calls
- Buy to open 1 AAPL Feb. 21 255 call
Butterfly Spread No. 2
In the long put butterfly spread (positioned for downside), notice that this butterfly setup will deliver returns even if the chart expands to numbers much lower than 190. Why? We capture $1,500 on the long put side from 210 to 195. Also, we only give back $500 if prices move down to 195 and below 190 in Apple stock. This leaves us with $1,000 as maximum profit available less the current cost of $148.
- Buy to open 1 AAPL Feb. 21 210 put
- Sell to open 2 AAPL Feb. 21 195 puts
- Buy to open 1 AAPL Feb. 21 190 put
The long call butterfly in Apple stock holds a current debit of $1.96 at this writing and the long put butterfly holds a current debit of $1.48. Together, the total risk is the debit you have paid for both butterflies. If you have a definitive bias toward a certain direction of Apple stock, then you can engage in only one of them.
The total highest potential profit is $15 (the distance between option strikes listed above) less the debit cost of $3.44. So we get $1,500 – $344 = $1,156 per set of options.
It is extremely rare to collect all this premium. Instead, I like to consider 200%-300% profit but big moves in Apple stock can deliver much higher returns.
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Trade Management
The relative resistance zone sits right around 250 for Apple stock. But traders are pricing in a wider range particularly after looking at the last three earnings moves have either continued in the move or changed direction sharply. The relative support stands near 200.
The strategy provides only two choices to exit the trade.
One, sell the butterfly that is performing at your target parameters, particularly once the middle strike is tested. Two, sell both butterflies right after earnings if the chart does nothing, or once your loss threshold gets hit. Mine is typically 65%-70% with these positions.
Anne-Marie Baiynd is a 25-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." You can find her on X at @AnneMarieTrades and on the IBD platform
