Target profits between $165 and $175 with a broken wing butterfly on Nvidia stock

Nvidia ( NVDA ) found support at its 200-day moving average, around $175 on Wednesday and appears to be moving forward.

Today we look at a broken wing butterfly trade that creates a profit zone between $165 and $175 with a profit potential of around $75. Yesterday, the stock closed around $183.04.

A broken-wing butterfly is a butterfly with putts spread with long strokes that are not the same distance apart from the short putt strike.

Broken-wing butterflies are more at risk on one side of the spread than the other.

You can also think of it as a butterfly with an “explored strike”.

The trade is usually set up as a somewhat sharp trade.

A broken-wing butterfly with puts is usually formed by buying a put, selling two lower puts, and buying another one out of the money.

An ideal trading setup is to create a broken wing butterfly for net credit, thus, there is no risk on the upside.

The main risk with business is moving too fast in the beginning of the business.

At NVDA, the April 17 broken wing butterfly can be set up by buying the $160 put, selling two of the $170 puts and buying the $175 put.

Here are the details of the business up to date:

1 Buy Apr 17, $160 put @ 3.60

On 2 Apr 17, sell $170 @ 5.85

1 Buy April 17, $175 for 7.35

Note that the upper stroke is 5 points away from the middle pot and the lower pot is 10 points away.

This broken wing butterfly trade will result in a net credit of $75, meaning if NVDA stays above $175, the profit will be $75 or 17.6%.

On the negative side, the maximum loss can be calculated by taking the difference between the two widths (5) multiplied by 100, minus the premium received.

This gives us 5 x 100 – 75 = $425.

The maximum profit can be calculated as 5 x 100 + 75 = $575

The ideal scenario for trading is that NVDA stays above $175 for the next month. The main profit zone of expiration is between $165 and $175.

The trade starts with a delta of 4, so it has a bit of a bullish bias to start with, but it will turn to a slightly negative delta near the end if NVDA is still above $175.

In terms of risk management, I would avoid losing 20% ​​of the capital at risk, or if NVDA falls below $165.

This is what the business looks like today:

You can see the main risk in trading is the initial price drop. The blue line is the profit and loss at expiration and the purple line is the T+0 line. T+0 just means “today”.

So, we don’t want the stock to enter the profit zone too soon.

What’s in four weeks? So what does the trade look like?

Looks great at any price above $172.

This strategy should move fairly slowly unless there is a sharp decline in the stock price.

You can do this on other stocks too but remember to start small until you understand a bit more about how it all works.

With any option trading, it is important to have a plan for how you will handle the trade if it moves against you.

A 20% stop loss might make sense in this scenario. If NVDA closes below $170 at expiration, there will be job risk

Please note that options are risky, and investors can lose 100% of their investment.

This article is for educational purposes only and not a business proposal. Remember to always consider yourself and consult your financial advisor before making any investment decisions.

As of publication date, Gavin McMaster held a position in: NVDA. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com