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Boeing: Option Trade of the Day

April 29, 2014 | About:
Karen Rogers

Karen Rogers

1 followers

For the past four months, Boeing (BA)'s stock price has traded in a $12.00 channel. The stock hit a high of $133.47 on Jan. 22, 2014 and a low of $121.40 on Feb. 5, 2014. Although the stock briefly flirted with the $133.47 ceiling, it could not muster enough strength to break through the price barrier. With the stock currently trading around $127 a share, Boeing is an ideal candidate for an iron condor option trade.

Set Up the Trade

Constructing a conservative iron condor trade places the option strikes at 115, 120, 140 and 145.

Action

Month

Strike

Option Type

Quantity

Price

Value

Buy to Open

Jun 14

115

Put

1

0.70

70.00

Sell to Open

Jun 14

120

Put

1

1.34

134.00

Sell to Open

Jun 14

140

Call

1

0.48

48.00

Buy to Open

Jun 14

145

Call

1

0.25

25.00

Calculate the Maximum Profit

The maximum profit is the difference between the total amount you receive selling the two options and the amount you spent purchasing the two options. The maximum profit for one Boeing iron condor trade is $87.00.

Maximum Profit

120 strike

134.00

 

140 strike

48.00

 

115 strike

-70.00

 

145 strike

-25.00

   

87.00

Analyze the Trade Risk

Boeing’s stock price must remain above the 115 strike and below the 145 strike until the options expire on June 16, 2014 to generate the maximum $87.00 profit.

Probability

Stock Price Above $115

94.39%

 

Stock Price Touches $115

10.91%

 

Stock Price Below $145

96.74%

 

Stock Price Touches $145

8.78%

Selecting Option Strikes

The option strikes selected depend on a trader’s risk tolerance and reward goals. Strikes placed closer to the stock price earn a bigger profit but also make the outer option legs more vulnerable to being in the money before the trade expires. Selecting strikes further away from Boeing’s stock price reduces the profit but also reduces the risk of going in the money.

Close the Trade

If Boeing’s stock price gets too close to the outer legs for comfort, prevent the trade from going in the money by closing out all four options. This strategy preserves a percentage of the profit and all of the trading capital. An alternative strategy is to close out the calls or puts that are in the money and open a new position further away from the stock price. The strategy selected depends on a trader’s style and how close the options are to expiration.

Disclosure: I have no position in Boeing and no plans to initiate a position within the next 72 hours.


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