With implied volatility on Boeing hitting recent lows, now may be an opportune time to consider a long straddle — especially if you expect a bigger-than-anticipated move in the stock.
A long straddle is an options strategy that takes no initial view on whether shares will rise or fall. Instead, it profits if the stock moves more than the market expects in either direction.
With Boeing trading near 230 on Monday, investors can consider a long straddle trade by buying both the 230 call and 230 put expiring September 19. This position costs about 15.75, which equates to a maximum loss of $1,575 if the stock closes exactly at 230 on expiration.
If Boeing makes a sharp move, gains can be substantial — potentially multiples of the initial investment. There are two break-even prices at expiration. Profits start accumulating roughly above 247.75 and below 214.25.
Options Appear Cheap on Boeing Stock
On initial glance the Sept. 19 options appear cheap on Boeing stock. With an implied volatility of just 26%, it's at its lowest level and far below the stock's realized 30-day and 252-day volatility readings of 29% and 39%, respectively.
This lower implied volatility is partly justified — Boeing already reported second-quarter earnings on July 29, and overall market volatility of the S&P 500 has pulled back in recent weeks. While a recent machinist strike on Aug. 4 could be a source of volatility, the scope remains minor with only 2% of Boeing's workforce affected.
Boeing shares broke out of a double-bottom pattern in April, reaching a profit target zone in July. Momentum remains to the upside, with the stock above both its 50-day and 200-day moving averages. However, shares also appear somewhat extended, which could favor a neutral strategy like a straddle.
Boeing has enjoyed strong demand this year — securing major plane orders, benefiting from rising aerospace and defense spending, and striking a deal with the DOJ over the 737 Max crashes. Still, the company remains in a transitional phase and is not yet profitable.
Steven Bell is a writer and trader based out of Vancouver, British Columbia. He is the author of IBD's Income Investor column, focused on shedding insight on low-risk, underfollowed stocks.
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