Using A 'Broken Wing Butterfly' Strategy To Trade Uber Stock

Uber Technologies (UBER) is one of few stocks now trading above both its 50-day and 200-day moving averages. Shares have held up well during the current correction, but risks are still high. 

Here's a strategy with a slightly bullish outlook and a substantial profit zone on the downside.

Called a "broken wing butterfly," it uses puts in this case because the short strike will be below the stock price. This also helps to reduce assignment risk.

With a regular butterfly option trade, the wings are placed an equal distance from the short strike. But with a broken wing butterfly, investors leave a larger gap on a particular side. This results in less risk on one side and more risk on the opposite side.

How To Set Up The Trade

Here's a look at how to set up a potential broken wing butterfly trade on Uber stock.

— Buy one May 16, 50 put @ 0.30

— Sell two May 16, 60 put @ 1.35

— Buy one May 16, 65 put @ 2.55

Notice that the upper strike put sits five points away from the middle put and the lower put stands 10 points away. 

This broken wing butterfly trade will result in a net debit of $15, which is also the maximum loss if the stock finishes above 65. In that case, all the puts expire worthless leaving the trader with a $15 loss.

On the downside, calculate the maximum loss by taking the difference in the widths — five — multiplied by 100, plus the premium paid. That's five times 100 plus 15, or $515. Meanwhile. the maximum gain adds up to five times 100 minus 15, or $485.

An Ideal Scenario For Uber Stock

The ideal scenario for this hypothetical trade is that Uber stock stays relatively flat and finishes somewhere between 55 and 65. The trade starts with a delta of zero, so is perfectly neutral to start, but that will flip to a negative delta closer to expiry if the stock is still above 65.

In terms of risk management, it's best to set a stop loss of 20% of the capital at risk, or if Uber breaks below 55.

Uber stock is ranked second in Investor's Business Daily's Leisure-Services group, according to IBD Stock Checkup. Further, it has a Composite Rating of 93, an Earnings Per Share Rating of 82 and a Relative Strength Rating of 81.

It's important to remember that options are risky and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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