The above chart breaks down the details of a recent trade we did where we sold a broken wing butterfly in the ARK Innovation ETF (ARKK) in the regular May monthly cycle. The strategy involves the purchase of the $53 put, then the sale of two $52 puts, and then the final purchase of the $48 put. I believe we collected $0.40 for the trade which means our breakeven is $50.60. At present, as I write, ARKK is trading above $66 a share. The chart above depicts a probability of profit of 88% in the trade.
Why is this so? The reason this strategy has such a high probability of profit is that when you collect money on the position, you are eliminating any risk to the upside. So basically, the position over the next 60 days or so can go anywhere to the upside but also can drop to the $50.60 level (Remaining above) and the trader will still come out winning. In an ideal world, we want ARKK to slowly drift down to ultimately rest at our short strikes of $52 as this would potentially increase our gains in the position. We acknowledge that the probability of this happening is remote which is why we like to set up these strategies to win from the outset.
As we can see from the technical chart above, shares of ARKK have solid downside support just below the $50 level and the weekly MACD is very close to giving a buy signal. Suffice it to say, we may not get the down move we are looking for if indeed the MACD moving averages cross-over but we will still come out winning nonetheless.