Tesla Stock Broken Wing Butterfly could fetch nearly $1,000

Tesla (TSLA) has had a rough time recently, with its share price down 43% in the past three months.


Today I want to look at a strategy with no risk on the upside and a healthy profit zone on the downside.

The strategy is called a broken wing butterfly. We will use puts because the strikes will all be below the share price. This helps reduce allocation risk.

In a regular butterfly option trade, the wings are placed equidistant from the short stroke. But with a broken butterfly wing, we leave a larger gap on one side.

This results in less risk on the one hand and more risk on the other.

Let’s take a look at how to set up a broken wing butterfly trade on Tesla stock.

  • Buy 1 Dec. 16, 140 putt at 3.15
  • Sale 2 Dec. 16, 155 sets to 6.70
  • Buy 1 16 Dec. 165 pit at 10.50

Strike prices differ in distance

Note that the upper strike pit is 10 points away from the middle pit and the lower strike pit is 15 points away.

This broken butterfly trade results in a net credit of $25, meaning there is very little risk if Tesla shares bounce.

The worst that could happen is that all the puts expire worthless, leaving the trader with a loss of $25.

On the other hand, the maximum loss can be calculated by taking the difference in the widths (5) multiplied by 100, plus the premium paid. That gives us 5 x 100 + 25 = $525.

Max win close to $1,000

The maximum win can be calculated as 10 x 100 — 25 = $975.

The ideal scenario for the trade is for Tesla stock to remain flat initially and then slowly drift lower to close around 155 at expiration. The total win zone is between 145 and 165.

The trade starts with a delta of 2, so it has a slight bullish bias to begin with, but that will turn into a negative delta closer to expiration if the stock is still above 165.

In terms of risk management, I would risk a stop loss of 20% of capital, or if TSLA fell below 145.

According to the IBD Inventory ControlTesla stock ranks #4 in its industry group and has a Composite review of 45, a EPS rating of 75 and one Relative power rating from 12.

It is important to remember that options are risky and investors can lose 100% of their investment.

This article is for educational purposes only and not a trading recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster holds a Masters in Applied Finance and Investments. He specializes in income trading using options, is very conservative in his style and believes that patience in waiting for the best setups is the key to successful trading. Follow him on Twitter @OptiontradinIQ


VIX Today: How to Build a Call Option Ladder to Protect Your Portfolio

With skyrocketing volatility, here’s how to monetize Bitcoin

Goldman Sachs Stocks Today: Why This Iron Condor Options Trade Can Make $165

ANET Stock Call option gives leverage with less capital

Leave a Reply

Your email address will not be published. Required fields are marked *