Boeing (BA) has bounced from the May lows and is heading toward resistance in the 145-150 range. The rally from 120 to 140 by Boeing stock was impressive. Yet perhaps shares are now due to consolidate those gains for a few weeks.
When option traders form an opinion that a stock is going to trade sideways, they might look to sell a short straddle.
This option trading strategy involves selling an at-the-money put and an at-the-money call with the same strike price with the same expiration date.
This trade generates a large amount of premium for the option seller. But it does come with risks. A short straddle is an unprotected trade, sometimes referred to as a “naked” trade. Naked options can be risky as they expose the trader to potentially unlimited losses if the stock makes a big move.
However, if the trader is right and the stock trades sideways, large gains are also possible.
Boeing Stock: Setting Up The Short Straddle
Assuming a trader believes that BA will trade sideways over the next few weeks, they could look to sell a July 15-expiration put option with a strike price of 140 and a July 15 140 call.
On Tuesday, the July 140 put sold for around $7.65 and the 140 call sold for around $8.80.
Selling those two options in Boeing stock would generate a total of $1,645 in premium. That is the maximum possible gain on the trade if BA stock closes right at 140 on the day of expiration.
To work out the break-even price of the trade, take the strike price of 140 plus and minus the total premium received of $16.45. That gives you 123.55 and 156.45. So, if BA traded below 123.55 or above 156.45, then the trade would start to suffer losses.
This Boeing stock trade is a short vega trade. This means if implied volatility increases early in the trade, losses could occur. At the moment, implied volatility on BA stock is around 44%. That stands above average for the past 12 months.
Short straddles are an advanced option strategy, so if all that sounds confusing, it’s best not to trade them.
Why Risk Is Infinite In This Trade
With a trade like this the potential losses are unlimited and a lot higher than the potential gains. So, traders would want to be very confident that the stock is going to remain flat over the course of the trade.
Please remember that options are risky, and investors can lose 100% of their investment.
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. Follow him on Twitter at @OptiontradinIQ
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