Guest Post by Gavin McMaster
Boeing stock has been absolutely crushed due to the coronavirus and is down a whopping 68.70% from the high it hit in March 2019. At one point the stock was down a mind-boggling 79.57%. Truly amazing and utterly devastating for investors.
The stock has recovered somewhat bouncing from a low of $89 to the current price of $136.33 but it’s likely to still face a rocky round ahead.
Two main things concern me when looking at the chart and considering if I should buy Boeing:
- It has just broken back below the 20-day moving average.
- There is significant distribution occurring in the stock. Despite the recent rally it looks me, purely based on the chart, that investors are continuing to unload the stock.
Stock investors are stuck with two options – buy Boeing or being in cash.
Options traders have so much more flexibility. You can go long, short, neutral and trade volatility. They can be risky if you don’t know what you are doing, but when used correctly they can be a powerful tool to add to your investing arsenal.
You can learn the basics here, but today I want to share with you a strategy that will profit if BA stock declines, stays steady or rises by less than 25.6% over the course of the next two months
The strategy is called a bear call spread and is a risk defined option strategy.
On Boeing stock, a bear call spread could be set up using the $170 strike as the short call and the $175 strike as the long call.
As of today, this trade offered a 33.33% return on risk over the next two months when using the June 19th expiry.
The maximum profit on the trade would be $125 per contract with a maximum risk of $385.
The spread would achieve the maximum 33.33% profit if BA closes below $170 on June 19th in which case the entire spread would expire worthless allowing the premium seller to keep the $125 option premium.
The maximum loss would occur if BA closes above $175 on June 19th which would see the premium seller lose $385 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk defined strategy and you always know the worst-case scenario in advance.
In this case, BA could go to $400 (unlikely) and the most this trade would lose is $385.
The breakeven point for the bear call spread is $171.25 which is calculated as $170 plus the $1.25 option premium per contract. Keep in mind that due to the bid-ask spread, you may not be able to get filled at these prices.
For a trade like this, I would set a stop loss of 20% of capital at risk, so around $75. Otherwise, if BA broke back above $160 I would also consider closing the trade early to avoid suffering the max loss.
The one wildcard with trade is the Q1 earnings announcement which is set for April 29th. Stocks tend to exhibit big moves after and earnings announcement and that could be especially true at this time with so much uncertainty.
I hope you enjoyed reading about this option trade idea, let me know if you have any questions.
Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Thanks for reading.
Options Trading IQ
Guest Post Author
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. Gavin has written 8 books on options trading and you can find more from him at www.optionstradingiq.com