This Earnings Trade Could Make You 200% by February 12

AppLovin (APP) reports on February 12, and option chains have the stock on pace for an outsized move. With wider price ranges likely in the run-up to and after earnings, let’s make a trade with this likelihood in mind.

The trade to make is a double butterfly formation.

Let me show you how to do it.

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.

Right now, the relative resistance zone for APP sits right around $400, but traders are pricing in a wider range particularly after looking at several of the last earnings moves. The relative support is near $300. With that in mind, here’s how to set up the two parts of the double butterfly.

First, the long call butterfly (positioned for upside in the details below) part. If price action is outsized, we capture $2000 less the cost of the call butterfly, currently $65, if prices move into $400:

• Buy to open 1 APP 21 Feb 380 calls 
• Sell to open 2 1 APP 21 Feb 400 calls 
• Buy to open 1 1 APP 21 Feb 420 calls 

Second, the long put butterfly (positioned for downside in the details below) part. If price action is outsized, we capture $2000 less the cost of the put butterfly, currently $145, if prices move into $300:

• Buy to open 1 APP 21 Feb 320 puts 
• Sell to open 1 APP 21 Feb 300 puts 
• Buy to open 1 APP 21 Feb 280 puts 

The long call butterfly holds a debit of $0.65 as I’m writing this, and the long put butterfly holds a debit of $1.45. 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 highest potential profit is $20 (the distance between strikes) less the cost of the debit incurred by buying both butterflies (0.65 + 1.45 = 2.10): $20 – $2.10 = $17.90 

Keep in mind that it’s extremely rare to collect all this premium. Instead, I like to consider 200%-300% profit of the investment but big moves can deliver much higher returns. 

Trade Management

The strategy provides only two choices to exit the trade:

1. To sell both butterflies when the performing butterfly moves into your target parameters – particularly once the middle strike is tested. 
2. To sell 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. 

Keep in mind that the option chain I chose only delivers time for 10 days or so – this means that any rapid moves will shift the prices of these positions sharply. 

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