Profit 2 Ways From A Single Earnings Report With This Unique Trade

Cybersecurity company Palo Alto Networks (PANW) reports next week and with a wide range of stock moves possible for after, let's consider setting up a double butterfly formation.

This kind of trade will allow us to profit from the stock moving in either direction.

Let me show you.

Trade structure – the long double butterfly setup

A double butterfly is ideal for larger anticipated moves into a catalyst like earnings. This setup is a combination of a long call butterfly and a long put butterfly.

A long call butterfly is the combination of a long call spread and a short call spread that share the same short strike. A long put butterfly is the combination of a long put spread and a short put spread that share the same short strike. They are positioned as two separate trades.

The long call butterfly (positioned for upside):

• Buy to open 1 PANW 20 Dec 450 calls
• Sell to open 2 PANW 20 Dec 460 calls
• Buy to open 1 PANW 20 Dec 470 calls

The long put butterfly (positioned for downside):

• Buy to open 1 PANW 20 Dec 330 puts
• Sell to open 2 PANW 20 Dec 320 puts
• Buy to open 1 PANW 20 Dec 310 puts

The long call butterfly holds a current debit of $0.97 at this writing and the long put butterfly holds a current debit of $0.67. Together, the total risk is the debit you have paid for both butterflies, or if you have a definitive bias, you can engage in only one of them.  

The total potential profit is $10 (the distance between strikes) and the cost of the debit ($0.97 + $0.67=$1.64) $10 – $1.64 = $8.36

It is extremely rare to collect all this premium. Instead, I like to consider 200%-300% profit of the investment.

Trade Management

The relative resistance zone sits right around $400 but traders are pricing in a wider range particularly after looking at the last three earnings moves have either continued in the move or changed direction sharply. The relative support is near $330.

The strategy result provides only two choices to exit the trade:

1. To sell the butterfly that is performing at your target parameters, particularly once the middle strike is tested.
2. To sell the both butterflies right after earnings if the chart does nothing, or once your threshold for loss is hit. Mine is typically 65-70% with these positions.

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