Update: Adjusting BA Put Calendar

by Dan July 25, 2018 10:30 am • Trade Ideas

Yesterday in our preview of Boeing’s (BA) Q2 earnings, reported this morning, we detailed a defined risk bearish leaning strategy:

One way to play for a move less than expected with an inclination lower would be with a put calendar targeting the implied move.

-Sell to open 1 July 27th weekly 342.50 put at 1.90

-Buy to open 1 Aug 342.50 put for 4.90

Break-even on July 27th expiration:

If the stock is 342.50 or higher the short July 27th put will expire worthless, reducing the cost of the long Aug 342.50 put. If the stock is lower than current levels, the decline in value of the Aug put should be offset by an increase in deltas resulting from the price movement lower and the premium received for the short July put.

If the stock is higher than the short July put will expire worthless, the long Aug put will lose value, but depending on how much higher the July put premium could offset lost value in Aug.

Max premium at risk is $3, or less than 1% can only be a total loss if the stock is significantly higher than current levels or well below the strikes.

The stock is down 3.3% this morning after reporting a better than expected quarter but offering guidance that did not beat Wall Street estimates.

With the stock trading at $346, slightly below the implied movement (days not done yet) it makes sense to look at ways of managing this trade idea. First, it’s important to address our normal long premium event trade disclaimer. As we often say you need to get a lot of things right to merely break-even into an event like earnings, first and foremost direction, the magnitude of them move and timing. In this instance, we are doing fine on all three, but we have some decisions to make:

First, do you think the stock stays here, rallies or falls further between now and Friday’s close when the short 342.50 put strike will expire. So it is a bit of a market call.

Second, this trade did best if the stock were to slightly underperform the implied move of about $14, which it has down about $12.50.

Third, timing, we have two and half trading days until Friday’s close, so it makes sense to consider the risk-reward of leaving the position intact; ie not covering the short put, or taking the profit all-together.

With the stock at $346 the Short July 27th weekly 342.50 put is worth about $1.80 for a 10 cent profit and the long Aug 342.50 put is worth $6.90 for a $2 profit, so about a $2.10 profit in total.

At this point I think it makes sense to play for lower lows, and what makes sense is to cover the short July 27th weekly 342.50 put and turn the position into a vertical put spread.

Action: Buy to close 1 BA($346) July 27th weekly 342.50 put for 1.80
Action: Sell to open 1 BA ($346) Aug 330 put at $3

The roll results in a $1.20 credit, reducing the original cost of the put calendar to $1.80 leaving the new position:

Adjusted Position: BA ($346) Long Aug 342.50 / 330 put spread for $1.80

New Break-even on Aug expiration:

Profits of up to 10.70 between 340.70 and 330 with max gain below

Losses of up to 1.80 between 340.70 and 342.50 with max loss above.