Boeing is a member of the Dow Jones Industrial Average but one of the laggards for about a year now. Its IBD Composite Rating is at a dismal 35 and the relative strength line is at all-time lows. This bear call spread for Boeing stock profits if there is further weakness following the company's earnings report before the market opens tomorrow.
Constructing a Bear Call Spread In BA Stock
For a bear call spread, you sell a call option while also buying a call option at a higher strike price with the same expiration. In the case of Boeing stock, investors could sell the 170 call while buying the 180 call using a May 20 expiration.
This bear call spread traded around $4.20 per share this morning and is a net credit to the investors account. The maximum profit is the premium received for 100 shares per contract or $420. If BA stock trades under 170 at expiration the options expire worthless and you keep the full credit.
To calculate the maximum loss use the width of the strikes less the credit received. In this case, the calculation is 10-4.2 x 100 = $580. This loss occurs if BA stock trades above 180 on expiration.
This trade is currently slightly short volatility. So, if Boeing stock remains at its current price on expiration you experience a profit. Leaning short volatility is attractive as Boeing's 30-day implied volatility is at 51% while realized volatility is only 35%.
Boeing Stock To Report First-Quarter Results
This difference in volatility isn't a surprise. With first-quarter earnings out tomorrow morning, it's an added source of volatility. The options market is pricing in a 5.2% move in BA stock. Compared to the average move of 3.4% on Boeing's past earnings events, the volatility is a little elevated.
A simple short call would do a better job of capturing this short volatility and bearish view, but it comes with extra risk. The losses aren't capped in the event of an earnings blowout on Boeing stock.
One of the attractive traits of a bear call spread is that it's risk defined. No matter how much Boeing stock moves, you know in advance you won't lose more than $580 per contract.
It also gives the trader some flexibility. If Boeing stock rises on earnings but the expectation of renewed weakness is still there, you have some time before the options expire on May 20 to let your thesis play out.
Boeing is expecting an earnings loss of 25 cents per share on revenue of $16 billion. Boeing stock — while expecting to return to profit by the end of this year — has reported 3 straight years of earnings losses and has an EPS rating of 48.
