How To Go Bullish With Large Profit Potential And Minimal Risk

With the market still in an uptrend but looking a little extended, traders taking a bullish tack might want to think about doing so in a limited-risk way. One way to do that is with a bullish butterfly spread using options. With recent support at its 21-day moving average line, ANET stock is a candidate for such a trade.

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Setting Up The Bullish Butterfly

Arista Networks (ANET) is a highly rated stock in one of the top industry groups. According to IBD Stock Checkup, ANET stock is ranked No. 1 in its group and has stellar ratings from IBD: a Composite Rating of 98, an EPS Rating of 98 and a Relative Strength Rating of 95. ANET was recently one of 19 stocks on a screen of “perfect stocks.”

Setting up a butterfly spread involves three different option strikes, all with the same expiration date. The spread can use either calls or puts.

Trading a butterfly with a bullish bias allows us to place the trade cheaply and have a large potential payoff.

Assume we have a price target of 435 for ANET stock within the next few weeks. Let’s look at how we can set up a bullish butterfly based on those parameters.

• Buy 1 Nov. 15 call at a strike of 415  @ 16.85.
• Sell 2 Nov. 15 call at a strike of 435 @ 10.35.
• Buy 1 Nov. 15 call at a strike of 455 @ 6.20.

That puts the cost of the trade at just $230 per spread with a potential payoff much higher.

Profit And Loss For ANET Stock Option

The maximum loss on the trade is simply the premium paid of $230 per spread. This occurs if ANET stock finishes past either end of the long calls at expiration: in other words, below 415 or above 455.

The maximum potential profit is $1,770. That would require ANET stock to finish right at the strike of the short calls, 435, at expiration. In that case the short calls and the 455 call expire and the 415 call is worth $2,000. Subtracting the cost of the spread leaves you with a $1,770 profit.

While the chances of getting the maximum profit relies on a close right at 435, there is a wide range of profit between the break-evens at 417.30 and 452.70. To calculate those numbers, take the long call strikes and either add or subtract the cost of the spread. Most important, the risk is minimal relative to the profit potential.

Arista Networks is due to report earnings on Nov. 7, so this ANET stock trade has earnings risk if held through that date.

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.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ

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