Stocks have gone on a massive run since bottoming on February 5th. SPX is up a massive 97 points in 7 trading days and RUT is up 63 point or 5.86%.
After such a strong run, stocks are due for a pause, but there is also the potential for momentum to push them 2-3% higher over the next week.
This is an ideal time to trade a very cheap directional butterfly. This is a low risk, high reward play. It’s a great way to play a further rise in the market without risking much capital at all. Here’s how you set up the trade:
Trade: RUT Bullish Butterfly
Date: February 14, 2014
Current Price: $1146
Trade Set Up:
Buy 2 RUT Feb 20th, 1165 calls @ $1.40
Sell 4 RUT Feb 20th, 1175 calls @ $0.55
Buy 2 RUT Feb 20th, 1185 calls @ $0.30
Premium: $50 Net Debit.
Max Potential Profit: $950.
For less than the cost of dinner for two, you could potentially make enough for a nice weekend away to somewhere exotic!
Check out my new book to learn more about butterfly spread such as this. Topics covered include:
– How to Successfully Leg Into a Butterfly
– Adjusting Butterfly Trades
– Butterflies and the Greeks
– How to Pick Entry and Exit Signals
– Using Directional Butterflies for Low Risk High Reward Trades
– Using Bearish Butterflies for Any Market Environment
– Why Broken Wing Butterflies are the “One-Size Fits All” Strategy
