Given the strength in Boeing lately, would a put ratio spread make sense at this juncture? While this advanced option trade is generally not suitable for beginners, it can have its place within an options portfolio. Let's explore an example with Boeing stock.
Options trading veterans generally consider this a neutral strategy, although 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, and even if Boeing stock continues to rise. Yet the key still lies in the timing!
What Is A Put Ratio Spread?
The strategy involves buying a put option out of the money and selling two put options further out-of-the-money.
The trade is placed 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 and it can also be profitable if Boeing stock moves up early in the trade.
The main risk with the trade? Watch for a sharp move lower early in the trade.
Boeing Stock Today: Setting Up The Ratio Spread
On Boeing stock, on Tuesday we could have bought the Feb. 17-expiration put option with a strike price of 180 for around $5.50 per share. Note this put is out of the money. Then, we could have sold two Feb. 17 170-strike puts, further out of the money, for around $3.25.
As we would have sold two contracts at $3.25 each, the trade results in a net credit of $1. If Boeing stock keeps a price of 180 or higher, basically all the puts would expire worthless, and the trader keeps the $100 premium.
A tent-shaped profit zone exists between 160 and 180. Therefore, the maximum gain in this Boeing stock trade occurs at 170 for around $1,100.
This strategy should move fairly slowly, unless there is a sharp drop in the stock price. The trade starts with a delta of 8, which means it is roughly equivalent to owning 8 shares of BA stock, although this will change as the trade progresses.
In terms of a stop loss, I would close the trade in Boeing stock if it was down $200. The expiration break-even price is 159.
According to IBD Stock Checkup, Boeing stock is ranked 22nd in its group and has a Composite Rating of 61, an EPS Rating of 1 and a Relative Strength Rating of 96. The Dow Jones Industrial Average component cleared a cup base with a 173.95 buy point.
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
