Stocks like Apple Inc. (NASDAQ:AAPL) and Netflix, Inc. (NASDAQ:NFLX) have grabbed headlines with their post-earnings moves, but another lesser-ballyhooed stock looks interesting from an options perspective: Boeing Co (NYSE:BA).
There are two criteria that make Boeing an interesting candidate to me for an options trade. The first is the three-month chart, which is just below.
BA stock rallied up past $185 at the beginning of March but was not able to close above that level until now. Boeing closed above that level consecutively on Friday and Monday. This may signal a potential move higher but of nothing else, this previous pivot level may now be potential support. As you will see below, this trade can profit if the stock cooperates and stays above certain levels. The more potential support the better!
Secondly, this trade idea involves selling option premium. You have probably heard the saying in trading buy low and sell high. This applies to BA options now because the current implied volatility (IV) of the options are above historical levels. Based on movements in Boeing’s stock, the options are priced above the volatility.
In other words, options might be priced for more than they should be.
One could also make the case for BA stock to continue to move higher based on when last week President Trump said he wants to boost the F-18 fighter and allotted over $1 billion for new planes. But this trade idea will last less than two weeks, so the option premiums and potential support is more critical in my opinion.
How to Trade BA Stock
The Trade: Sell the May $182.5 put and buy the May $180 put call for a credit of $0.50 or more.
The Strategy: The maximum potential profit for this trade is 50 cents if BA stock is trading at or above $182.50 at May expiration. Both put options would expire worthless. The maximum loss is $2.00 (2.50 – 0.50). This would occur if BA is trading at or below $180 at May expiration. Breakeven is $182.00 at expiration based on a credit of $0.50.
Boeing stock goes ex-dividend on the 10th of this month. Whether this is bullish for the stock remains to be seen. But if we look at this trade idea strictly from an edge perspective, you might like it even more.
At the time of this writing, the May $182.50 put had a delta of 0.28. Remember maximum profit is earned at $182.50 or higher at expiration. Keeping it simple, option delta is the rate of change of the option based on a dollar movement in the underlying. If an option had a positive 0.60 delta and stock moved a dollar higher, the premium should increase 60 cents based on the delta alone.
Option traders love to use delta as a percentage of expiring in-the-money (ITM). So in this case, the short option had a delta of 0.28, so it has a 28% chance of expiring ITM and a 72% chance of not.
The goal of this trade is to buy back the spread for less money or have the options expire worthless. A 72% chance may be worth the risk.
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at email@example.com. As of this writing, he did not own a position in any of the aforementioned securities.