by John Kmiecik | January 30, 2014 8:39 am
Boeing (BA) took a big hit this week, and now traders and investors are set to pondering when and whether the stock will move higher again. Of course, one of the nice elements to options trading is there’s a bullish strategy that can still profit — even if the stock declines. Here is a trade idea on Boeing stock that can accept a little pain in BA and still come out on top.
The trade: Sell the BA Feb 120/125 put credit spread (selling the Feb 125 put and buying the Feb 120 put) for 80 cents or better.
The strategy: The maximum potential profit for this trade is 80 cents if Boeing stock is trading above $125 at February expiration. The maximum loss is $4.20 ($5 – $0.80) if BA stock is trading below $120 at expiration. Breakeven is $124.20 at expiration based on a credit of 80 cents.
The rationale: Boeing earnings were just announced, and the results clearly were interpreted as being disappointing, given the 5% decline in Boeing stock Wednesday. But does this mean BA is no longer worth buying?
If you look at Boeing’s results, you would probably have to say that it still looks like a valid buy option for traders and investors. Boeing posted a 7% increase in revenue for the fourth quarter, which helped full-year revenue improve by 6% and set an all-time high. Earnings per share for the year were also higher by 20%. What’s not to like … right?
Well, investors might not have liked that 2014 guidance calls for just a 1% to 2% revenue increase. Of course, if the guidance really worries investors, maybe they should consider that Boeing has also taken steps to cut costs, primarily to offset U.S. government defense budget cuts.
Click to Enlarge Taking a look at the chart, Boeing stock just gapped down to a potential support area at $130. After its last earnings report, BA gapped up to that area, and once it traded above it, it barely closed below that level again.
This is the key component for this trade idea to profit. The previous pivot level that acted as support in the past needs to duplicate that feat through February expiration. This credit spread gives Boeing stock a little room to decline if the $130 level does not hold. The implied volatility of the options has decreased after the announcement, but it might continue to decrease which would lower the premium of this spread.
Boeing stock looks down now, but it might not stay grounded for long!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.
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