Volatility has become the topic of the week, after several big down days in the markets. This creates a sweet spot for capturing gains in a double butterfly trade toward the end of the month.

Amazon is the perfect stock for this trade, with earnings coming up.

Here’s how to use that to profit from the market volatility at minimum risk.

Amazon.com Inc. AMZN stocks’s relative resistance zone sits right around $240 at the time of this writing, but traders are pricing in a wider range particularly after looking at several of the latest earnings moves. The relative support is near $170.

A double butterfly is ideal for larger anticipated moves into a catalyst like Amazon’s earnings. This setup is a combination of a long call butterfly and a long put butterfly. 

A long call butterfly is the combination of a long call spread and a short call spread that share the same short strike. A long put butterfly is the combination of a long put spread and a short put spread that share the same short strike. They are positioned as two separate trades. 

The long call butterfly (positioned for upside in the details below) works like this: if price action is outsized, we capture $1000 less the cost of the call butterfly, currently $117, if AMZN’s share price moves into $220. 

• Buy to open 1 AMZN 28 Mar weekly 210 calls 
• Sell to open 2 AMZN 28 Mar weekly 220 calls 
• Buy to open 1 AMZN 28 Mar weekly 230 calls 

The long put butterfly (positioned for downside in the details below) works like this: if price action is outsized, we capture $1500 less the cost of the put butterfly, currently $107, if AMZN’s share price moves into $170. 

• Buy to open 1 AMZN 28 Mar weekly 185 puts 
• Sell to open 1 AMZN 28 Mar weekly 170 puts 
• Buy to open 1 AMZN 28 Mar weekly 155 puts 

The long call butterfly holds a current debit of $117 as I’m writing this and the long put butterfly holds a current debit of $107. Together, the total risk is the debit you have paid for both butterflies, or if you have a definitive bias, you can engage in only one of them. 

The total highest potential profit is $1500 for the put side and $1000 on the call side (the distance between strikes x 100) less the cost of the debit incurred by buying both butterflies ($107+ $117= $224).

It is extremely rare to collect all this premium on both sides, but we might be stepping into just this kind of backdrop. Set price alerts for both the top and middle strikes on both butterflies. I like to consider 200%-300% profit of the investment though big moves can deliver higher returns. 

The strategy provides several choices to exit the trade. I will discuss only two of them:

1. To sell both butterflies when the performing butterflies move into your target parameters, particularly once the middle strike is tested. 
2. To sell both butterflies right after earnings if the chart does nothing, or once your threshold for loss is hit. Mine is typically 65% with these positions. 

Note that the option chain I chose only delivers time for 15 days or so – this means that any rapid moves will shift the prices of these positions sharply. 

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