A nice technical setup may be arising in Ctrip.com International (CTRP) as the stock is approaching strong resistance levels. By initiating a June position, even a breakout of this level still offers a good chance for a profitable return.
While an Iron Condor would seem like the most likely setup, the risk/reward setups we looked at did not offer as good a return as setting up a broken winged butterfly. This position also offers the advantage of being profitable if the overall market experiences a major pullback that drags everything down.
Looking at the chart, the level of resistance sits in the $40 area, which has been twice since April. Support below resides in the $34 as well as the 200-day moving average. We expect to see range bound trading in the stock between now and June expiration.
BUY +10 BUTTERFLY CTRP 100 JUN 10 39/40/44 CALL @-.70 LMT
We are willing to risk $500 on the trade, which would be a breakout of the resistance level and run higher to $42. The maximum profit on the trade at expiration is $1,700 if the stock closes at the sold strike price of $40. If the stock closes below $39 at expiration we keep the net credit of $700. The trade requires $2,300 in margin.
