There are several option strategies that can profit if the stock moves in a direction but can also lose if it moves too much in that direction. One of the good points about these strategies is that they usually have a decent risk/reward ratio attached to them. Here is a trade idea like that on one of the biggest names out there.
Google Inc. (GOOG): Butterfly Spread
The trade: Buy the October 900/920/940 Call Butterfly Spread (buying the October 900 call and selling 2 October 920 calls and buying the October 940) for $3.30 or better.
The strategy: The maximum potential profit for this trade is $16.70 if GOOG is trading right at $920 at October expiration. The long 900 call option would have $20 worth of premium and the other options would expire worthless. Then the cost of the trade is subtracted (20 – 3.30). The maximum loss is $3.30 or what was paid for the spread if GOOG is trading below $900 (all options expire worthless) or above $840 (all options would have to be bought or sold) at October expiration. Breakeven is at $903.30 and $936.70 at expiration. Currently GOOG sits at $893.06.
Click to Enlarge The rationale: This is a completely speculative trade idea but one that gives the trade a wide area in which to profit. The trade can profit anywhere between $903.30 and $936.70 at October expiration. This long butterfly trade idea is more of a directional than neutral trade idea. Many butterflies are really set-up to profit from little or no price movement but this one profits if the stock moves higher. The downside to a butterfly is that maximum potential gains are realized close to expiration. So if Google moved into the profit area say tomorrow, the gains will not be nearly as much if it was expiration.
Technically, Google has been rallying from some recent lows and is now threatening to break a resistance area around $900. For this trade idea to profit it needs to move, but not move too much higher before October expiration. The reason the $920 area was chosen for the body of the butterfly (and maximum profit) was because there are previous highs in that area from two separate occasions; one in May and another in July. The last time the stock rose to $920 after trading about where it is now it took about a month which is perfect for October expiration. Go, Google, go — but go at a temperate pace.
No positions held. If you are interested in a free trial of my LIVE options trading room visit: http://markettaker.com/options_insider_trial/