Butterflies are low cost, high ROC spreads where you essentially try to "thread the needle" and pin the stock price on expiration. I'm trying it in Whole Foods Market (WFM)
So, WFM released earnings two days ago, and it was a blowout apparently. The stock has completely reversed. Now, since IV has gotten murdered (25%), selling upside calls is not worth the risk for the credit taken in. So, instead, I predict that WFM will move higher, but stall out around the 48 level.
I expect this to happen over next week and maybe into the week after. So, take a look at the risk profile:
We risk $112 to potentially make $288 if we pin the stock on the nose at expiration. Anywhere between 46.5X and 49.4X at expiration will make money, which is right in that resistance area.
I don't expect to make money on this trade, just because it's totally new. So risking a max $112 (0.56% of capital) is basically nothing for an experimental trade.
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