It’s been climbing straight up for over two months. At that point, what was the likelihood of it heading higher to close out the week positive? Probably pretty good, BUT…
Unemployment was the following day. And there’s been a smattering of voices expressing concern or even downright bearishness lately. This was a case for a reasonable bet to the upside but necessitating very low risk in the case of being wrong.
Here on this trade, the trader risked $440 max loss. But if he or she was right and NVDA rallied along its recent trajection, the trader could stand to make massively more. Perfect case scenario, the max profit could be $9,560.
To be fair, with butterflies—directional or not—traders aren’t looking for the max profit. But just close. It had a roughly 2% range in which it would be profitable between $245.11 and $249.89.
This trader made a bet that maybe placed the odds somewhat against him or her, but the risk reward more than balanced out the likelihood of success. Win, lose or draw, this was a very smart trade right out of the gate.
And this is why I’ve come to join the likes of other super smart traders like John who love directional butterflies.