Boeing is bouncing back after a monthlong decline, with defense stocks spiking as Israel and the U.S. mobilize their response to the Hamas attacks. By using a combination of option strategies, we could potentially buy Boeing stock for a significant discount or achieve a healthy profit if the stock trades sideways.
During Wednesday afternoon trading, the civilian and military jet and satellite maker rallied 3.7% in weekly volume that ran more than 50% above its 10-week moving average.
Keep in mind that Boeing stock has performed weakly in recent months. The potential for further declines remains high.
BA's IBD ratings act as testimony to that possibility.
According to IBD Stock Checkup, BA stock ranks a lowly 33rd in its group. It also sports a Composite Rating of 48, an EPS Rating of 16 and a Relative Strength Rating of 66.
Nonetheless, the stock market is back in a confirmed uptrend. So, stocks should be getting more wind in their sails — both current stock market leaders as well as the laggards.
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Boeing Stock Today: The Setup
Here's the trade. First, sell to open the Nov. 17-expiration put in Boeing stock with a strike price of 180, which recently traded around $3.50 per contract.
Then, add a bear call spread in the following manner:
- Sell to open the BA Nov. 17 call with a strike price of 215, which traded recently around $2.10.
- Buy to open the BA Nov. 17 call with a strike price of 220 at around $1.40.
The sold put brings in around $350 in option premium, and the bear call spread adds an additional $70 in premium. In total, the combination of the two trades in Boeing stock generates $420 in premium per set of options contracts.
The position starts with a delta of 19, meaning it is roughly equivalent to owing 19 shares of BA stock.
This figure will change as the trade progresses.
Possible Scenarios For The Option Trade
Let's work through a couple of scenarios of how this trade could look at expiration on Nov. 17:
- If BA stock trades sideways and finishes between 180 and 215, the sold put and bear call spread will both expire worthless. The total profit will be equal to the premium received of $420.
- If Boeing stock falls below 180 at expiration, we will be assigned the stock due to the sold put. We are forced to buy 100 shares at 180. However, our net cost basis will be $175.80 per share, thanks to the $420 in option premium received. That is 9.5% below the Tuesday's closing price.
- If Boeing stock rallies above 220, the bear call spread will suffer a full loss of $500. But this will be mostly offset by the $420 premium received, leaving the trade with a small loss of $80.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
