Benzinga Pro Trade of the Week: A Post-Earnings Trade With Limited Risk

Post earnings trades with stocks that generally produce movement make for solid setups with limited risk and outsized upside.  As with all trades, when I choose limited risk I must give something up in return – either limited gain, or lower probability of success.  Traders must realize that in the trading world everything we do creates an opportunity cost. 

Today's post earnings trade comes to us from SPOTIFY ($SPOT) 

The premise is the following – over the next 45 days, we expect to see the stock move away from its current location – but we do not know whether that move is higher or lower. 

Trade structure 

The long double butterfly  

A long double butterfly is positioned so the ‘long wings' of the trade give us a likelihood of returns, while using the short wings to finance part of the trade. 

FIRST – the long call butterfly- this is a long call spread and a short call spread that share the middle strike 

Buy to open 1 SPOT 20 SEP 340 call 

Sell to open 2 SPOT 20 SEP 350 calls 

Buy to open 1 SPOT 20 SEP 360 call 

The call butterfly above will cost .48 which makes the max profit $9.52 and the max loss at .48 (outside of commissions).  Total profits will begin to erode if the price of $SPOT stays above $350 

SECOND – the long put butterfly- this is a long put spread and a short put spread that share the middle strike 

Buy to open 1 SPOT 20 SEP 290 put 

Sell to open 2 SPOT 20 SEP 280 puts 

Buy to open 1 SPOT 20 SEP 270 put 

The put butterfly above will cost .24 which makes the max profit $9.76 and the max loss at .24 (outside of commissions).  Total profits will begin to erode if the price of $SPOT stays below $280 

The strategy result provides three choices to exit the trade. 

1. To sell both spreads once the middle strike of either spread is tested – that means we look at either setting an alert for $280 or $350 

2. To sell the spread once it hits your loss threshold as determined by personal risk.- this will happen with extreme movement. 

3. To sell the spread into the week before expiration, if all is going well and you have decided to hold the trade into closer to the end of expiration (I have had many a trade go sideways taking it down to the wire and not capturing gains, so I do not advise this) 

• Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of “The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology.” She writes for Benzinga as well as a variety of stock and options media outlets.. You can find her on X at @AnneMarieTrades  

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