A put ratio spread is an advanced option trade and is generally not suitable for beginners, but it can have its place within an option portfolio. Given the improved stock action recently in Boeing, now may be a good time to examine the profit possibility in Boeing stock with this strategy.
Boeing stock has rallied more than 16% from an October low of 176.25. The Dow Jones Industrial Average component is still in the early stages of creating a new base.
BA could face upside resistance at its 200-day moving average, currently at 208.05.
In general, options traders consider the put ratio spread as a neutral strategy. However, it has the ability to make a profit in up, down and sideways markets.
Yes, it can make money no matter which way the market goes. Yet the key lies in the timing!
Boeing Stock Today: Setting Up The Trade
Using Boeing stock for this trade, the strategy involves buying a put option and selling two put options further out-of-the-money.
When to place the trade? When the trader thinks the underlying stock will be stable or slowly move lower and finish around the short put strike at expiry.
A fall in implied volatility will benefit the trade. Also, this put ratio spread can produce a profit if Boeing stock moves up early in the trade.
The main risk with the trade? If Boeing stock makes a sharp move lower early in the trade.
Boeing Stock Soars On Big Emirates Order At UAE Air Show
As an example with Boeing stock, we could buy the Dec. 15-expiration put with a strike price of 190 for around $3.40. Then, we could sell two of the Dec. 15 185-strike puts for around $2.25.
As we are selling 2 put option contracts at $2.25 each, the trade results in a net credit of $1.10, or $110 per set of options contracts.
This acts as the maximum gain if Boeing stock holds above 190 at the Dec. 15 expiration. Basically, all the puts would expire worthless, and the trader keeps the $110 premium.
The Profit Zone
A tent-shaped profit zone exists between 179 and 190 with the maximum gain occurring at 185, yielding around $600 in total profit.
While the profit zone is below the current stock price, the strategy starts off with a bullish bias with a delta of 13. This means it is roughly equivalent to owning 13 shares of BA stock, although this will change as the trade progresses.
As the trade involves naked options, it is not recommended for beginners.
In terms of a stop loss, I would close the trade if it was down $300.
BA's Ratings Need Improvement
According to IBD Stock Checkup, Boeing stock ranks 34th in its group and has a Composite Rating of 50, an EPS Rating of 21 and a Relative Strength Rating of 47.
In addition, this combination trade on BA from last month has made a profit of $400 and can be closed.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
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
