For the past four months, Boeing (BA, Financial)'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 |
| Â | 140 strike | 48.00 |
| Â | 115 strike | -70.00 |
| Â | 145 strike | -25.00 |
| Â | Â | 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% |
| Â | Stock Price Touches $115 | 10.91% |
| Â | Stock Price Below $145 | 96.74% |
| Â | 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.
