Boeing stock is currently the most overbought stock in the Dow Jones Industrials Index, with a Relatives Strength Index reading of 79.48.
The stock has come a long way since late October, rising from 175 to 260.
Traders who think Boeing stock will pause here — or at least not rally too much more — could look at a bear call spread.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher — as long as it stays below the short call at expiry.
A February expiry bear call spread on Boeing stock using the 280-285 strike prices could be sold for around $1.15 late Wednesday.
Traders selling the spread would receive $115 in option premium. That's also the maximum possible gain. The maximum loss would be $385.
Max Profit If BA Is Below 280 At Expiry
The spread will achieve the maximum profit if Boeing stock closes below 280 on Feb. 16. In that case the entire spread would expire worthless, allowing the trader to keep the $115 option premium.
The maximum loss would occur if BA closes above 285 on Feb. 16, which would see the premium seller lose $385 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy: You always know the worst-case scenario in advance.
A stop loss could be set if Boeing trades above 280, or if the spread value rises from $1.15 to $2.30.
Traders Bullish On Boeing Should Pass
Because this is a bearish position, traders who think Boeing stock could move higher from here should not enter this trade. The position starts with a delta of -5, meaning it is roughly equivalent to being short 5 shares of Boeing stock.
According to the IBD Stock Checkup, the stock is ranked No. 25 in its industry group. It has a Composite Rating of 69, an EPS Rating of 20 and a Relative Strength Rating of 90.
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.
