Quest Diagnostics stock is currently hovering in and around a buy zone. But amid a backdrop of geopolitical and economic uncertainty, it's best to manage risk a bit more than simply buying long calls or taking the stock long.
That's where a long call butterfly might come in handy. A long call butterfly is the combination of a long call spread, and a short call spread that share the same short strike and the same expiration date.
Quest Diagnostics Stock: The Options Strategy
Though the position is often defined as 'delta neutral', this trade certainly delivers a profit if price action rises as expected.
Let's set up the trade in Quest Diagnostics stock as follows:
- Buy to open one DGX July 18-expiring call with a 175 strike price
- Sell to open two DGX July 18 185 calls
- Buy to open one DGX July 18 195 call
The long call butterfly holds a current debit of $3.40 per set of options at this writing. It represents the total risk incurred in the trade. The breakeven price of the stock at expiration on this trade is 178.40 less commissions.
Calculate the total highest potential profit as $10, or the distance between the two option strikes at 175 and 185 minus the cost of the long call butterfly. So, we get $10 – $3.40 = $6.60 less commissions, or $660 for a block of 100 shares. That represents an approximately 100% return.
It is extremely rare to collect all this premium in this kind of butterfly. Consider price action in Quest Diagnostics stock as the information you need to drive your risk and profit parameters; consider profit targets near technical resistance price levels and aiming at a 50% return for this trade.
Trade Management
Let's identify key chart levels. First, the current relative resistance zone for Quest Diagnostics stock sits right around 183. But trading could be choppy for the next week. So, I would wait to target and entry on any dips to 175. This will minimize risk exposure and allow for better profit targets.
Set an alert for prices near the middle strike price of 185 so that you stay keenly aware of the motion into the middle strike. Why? This price level stands as where the maximum profit will engage into expiration for the trade.
You will also notice that price action for the butterfly is more sensitive to fluctuation the closer we are to options expiration. Support sits near 170 in this sharply upward moving chart.
Exit Strategies
The strategy provides several ways to exit, but I will discuss only two. First, sell the call butterfly when the profit goal moves into your target parameters, particularly once the middle strike is tested near the expiration time of July 18. I often look for 40%-to-70% returns for these types of call butterflies. This tends to happen when the first long call strike gets in the money.
Second, sell the call butterfly when your loss threshold is breached. Customarily, this is 50% for me.
The more advanced trader might consider rolling the short strikes down over time if price action continues upward.
Anne-Marie Baiynd is a 25-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." You can find her on X at @AnneMarieTrades, Sirius Business Radio, Investor's Business Daily, the Benzinga Pro platform as well as Topstep on YouTube
