BA Analysis

The aircraft manufacturer The Boeing Co. (BA), headquartered in Chicago, Illinois, publishes earnings on Wednesday before the opening bell.

[BA in Wikipedia]

BA

I shall use the DEC series of options, which trades for the last time 58 days hence, on Dec. 18.

Ranges

Implied volatility stands at 27%, which is 1.7 times the VIX, a measure of volatility of the S&P 500 index. BA’s volatility stands in the 54th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	153.75	168.60	144.58
Lower	124.07	109.22	133.24
Gain/loss	10.7%	21.4%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

I am neutral BA over the shorter term, with a slight bearish bias. It's a hard grid to work with because the strikes are $5 apart, making for lower granularity.

Iron condor, short the $150 calls and long the $155 calls,
short the $125 puts and long the $120 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
Upper	150	86.4%
Lower	125	82.1%

The premium is $0.94, which is 19% of the width of the position’s wings. The stock at the time of purchase was priced at $139.13.

The risk/reward ratio is 4.3:1.

The zone of profit in the proposed trade covers a $25 move either way. The biggest immediate move after each of the past four earnings announcements was $5.67, and the average was $2.61.

Decision for My Account

The risk/reward ratio is higher than I like, and the premium is too low. And of course, the two go hand in hand.

Because of the $5 spread between strike prices, my next alternative would be to go short the $145 call and the $130 put, but that would put the probability of expiring out of the money for maximum profit with at 73% and 72%, respectively. I very much prefer to have my probabilities around 80%, being a big fan of sure things.

It's not an awful trade, but there are other opportunities sliding down the calendar during this earnings season, and I would rather keep my funds handy for those. I'm passing on the trade.

-- Tim Bovee, Portland, Oregon, Oct. 20, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.