A put ratio spread is an advanced option trade that can have its place within an option portfolio — even in a blue chip such as Boeing (BA). Boeing stock is showing bullish action so far in 2023 and has set up a flat base that offers a 221.43 buy point.
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Option veterans generally consider the put ratio spread a neutral strategy. Yet it has the ability to make a profit in up, down and sideways markets. The key lies in the timing!
The strategy involves buying a put option 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 this trade in Boeing stock. It can also generate a profit if the stock moves up early in the trade. The main risk with the trade? A sharp move lower early in the trade.
Boeing Stock Today: Setting Up A Put Ratio Spread
On Boeing stock, we could buy the May 19-expiring put option with a strike price of 200 for around $5. Then, we could sell two of the May 19 190-strike puts for around $2.95. As we are selling two contracts at $2.95 for a total premium of $5.90 received, the trade results in a net credit of $0.90 per contract.
Initially, this marks the maximum gain above the Boeing stock price of 200. Basically, all the puts would expire worthless, and the trader keeps the $90 premium.
A tent-shaped profit zone exists between 180 and 200; the maximum gain triggers at 190 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 7, which means it is roughly equivalent to owning 7 shares of BA stock. This will change as the trade progresses.
As the trade involves naked options, it is not recommended for beginners.
Where To Set A Stop
In terms of a stop loss, I would close the trade if it was down $300.
According to IBD Stock Checkup, Boeing stock ranks No. 18 in its group and has a Composite Rating of 78, an EPS Rating of 25 and a Relative Strength Rating of 94.
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
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Source: https://www.investors.com/research/options/boeing-stock-today-why-the-put-ratio-spread-can-gain-as-much-as-1100-by-may/?src=A00220&yptr=yahoo