Even amid the slight bump higher in the stock market today, it still makes sense to consider options trades that take advantage of conditions that do not point to a strong price trend in either direction. Boeing has been in a free fall since its earnings release in August. So, this column spotlights a short iron condor in Boeing stock.
After three weeks of steady downward flow, traders came in with a fair bit of volume to make higher lows. My premise remains that we are caught in a wide sideways formation until a major catalyst appears.
As always, in the wide range of motion, I look to the constant of time to find my edge in the market. A savvy option strategy puts the cost of time, or theta in options-speak, in our favor.
With an alert set on the rising VIX (the 30-day implied volatility reading of the market), and another with call buying from those expecting another seasonal fourth-quarter bounce, we have the perfect backdrop for a broad range.
The broad ranges in crosscurrents will provide premium that option traders can take from the market. In other words? Position to benefit from those looking for directional motion.
Going back to Boeing, the Dow Jones Industrial Average component seems to show a never-ending backlog of undelivered planes affecting operations like to Ryanair, and hefty competition from Airbus. No wonder Boeing stock has faded so steadily off pre-pandemic highs.
The stock recently took out its 200-day moving average too.
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Boeing Stock: Setting Up The Trade
In fact, Boeing has been a heartbreaker for both bulls and bears over the years. Therefore, Boeing stock poses as an ideal candidate for the longer-term short iron condor. Why? It traps the ranges of monthly support and resistance.
Here's an example Boeing stock trade using the short iron condor with longer expiration:
- Sell to open 1 BA Jan. 19-expiration call with a 220 strike price
- Buy to close 1 BA Jan. 19 230 call
- Sell to open 1 BA Jan. 19 175 put
- Buy to close 1 BA Jan. 19 165 put
This will create a credit event of $3.80. Calculate the break-even high price of $223.80 (the relevant call option strike plus the collected premium) and a break-even low price of $171.20 (the short put option strike minus the collected premium).
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD. The option toolbox also gives me a great advantage studying the many ways to extract money and position myself in the market.
Selling an iron condor is a neutral position that surmises price action will be somewhat sideways during the time the iron condor is in play. Options sellers are positioned to win in two ways. One, the stock does nothing. Or two, Boeing stock moves within the ranges, so we use this concept to minimize the risk of market exposure.
Managing The Trade In Boeing
Weekly support sits near 170 and 230 as near-term resistance — see Market Smith for the clean lines showing this range. But our goal with the iron condor is to simply allow theta, or time decay, to allow us to be paid for the time in the chart.
Scenarios to consider? Check these out:
- Boeing stock grinds lower but does not break 175 for more than three days. This gives bottom pickers time to engage in support behavior. If Boeing stock holds below 175 for more than three days, we must exit the trade.
- Stock grinds higher but does not break 220 for more than three days. This gives so-called "top pickers" time to engage in resistance behavior. If we stay above 220 for more than three days, we must leave the trade.
- BA holds these ranges until we have 30-40 days left in the position. This is the sweet spot for our exit. The closer we get to expiration, the more sensitive options get to pricing and volatility. And this opens the door to price action in Boeing stock that can be unfavorable to the option sellers because the closer we get to expiration, the volatility rises in the chains.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully. Also, stay patient and allow price action to move around a range of your stops. This trade is not a recommendation to buy or sell, but rather an example of a type of options trade.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
