Bull Put Spread – Boeing Stock Options Trade

by | Mar 13, 2019 | Bishop's Corner

Stocks are surging this afternoon… despite mixed economic numbers this morning.

That said, my focus always remains the same. I study all the economic data, as well as what comes out of the Fed’s mouth. Also, I’m closely following bonds and overall market volatility. Its the best way I’ve found to gauge market sentiment.

Now, I’m primarily trading options and using technical analysis to come up with my entry points (there is actually a chart pattern I use that I call my money pattern.)

Why options?

Because it allows you to control your risk on trades… even on volatile stocks.

Boeing Stock Negative Catalyst

For example, I’m sure you heard about the tragic accident last weekend when a Boeing 737 Max 8 plane (Ethiopian Airlines) crashed and killed all 157 passengers.

It marked the second crash in less than six months for the Boeing 737 Max 8. In October, Lion Air Flight 610 crashed 12 minutes after takeoff, killing everyone on board.

On Monday, Boeing shares opened about 50 points lower in reaction to the crash.

Analysts Defending Boeing Stock…

However, some analysts, like Buckingham’s, Richard Safran, believed the two Max 8 crashes will not have a meaningful financial impact to Boeing.

He later reiterated his price target of $390 per share when the stock was trading 11% lower at $375.00 per share.  

Now, Boeing is one of the largest companies in the world ($200B+ and a part of the Dow Jones), but despite that, volatility in the stock was sky high.  

And despite the horrible news, you have to think Boeing has procedures in place to handle awful situations like this… and that eventually… shares of the stock would stabilize.

However, buying the stock was too risky…and because there was so much news coming into the stock… buying calls were too expensive.

So instead of putting on a trade I didn’t like… I put on a strategy that mitigates a lot of risks while still staying to true to my trade idea.

Bull Put Spread Explained

If you’re bullish on a stock… you don’t have to just buy it… especially if it’s an expensive stock, in fact, there’s a strategy limits your downside risk.

Why is this good?

Well, you never know when a stock could just reverse the trend and go against you… or worse, gap down overnight… and you panic, trying to get out… fumbling on your exit… taking a big loss… just because you didn’t use a less-risky strategy.

What are we talking about here?

Well, it’s the bull put spread.

With the bull put spread, you would purchase put options at a strike price – let’s call it price A… while simultaneously selling put options at strike price B… now strike price B will be greater than strike price A.

Here’s a look at the bull put spread.

What’s going on in this chart above?

Well, it means you’re slightly bullish on the stock… and think it will rise… but not by that much. Moreover, as you can see… even if the stock gets decimated… your risk is limited. However, your profit is also limited.

Well, let’s get a better perspective with a real trade example.

Bear Put Strategy on Boeing (BA) Stock

Here was my thinking with this strategy…

I set up the Boeing stock spread trade a couple of days ago when the bad news was announced, and then I added to it.

However, I didn’t think this would be catastrophic for BA stock.

I went with the exact contracts I told Weekly Money Multiplier clients about in an alert a couple of days ago… before I set this up.

As you can see below (under my Amazon options trade)… as long as BA stays above $350 by Friday next week, I should capture 100% of the premium I sold for the $350 puts but I will also LOSE 100% of the value on the $345 puts I bought.

The difference in the two contracts’ value is the net gain I am trying to make on the trade… Sell one at a high price, buy one at a lower price. You pocket the difference if it works out… it’s really that simple.

In this case, the difference is about $16K I have riding on the line here. Not a bad payday if it works out for just betting that a bad situation won’t become catastrophic for BA.

Now, if you were bullish on Boeing… and just traded stock… think of how expensive that would be. The stock trades at over $370 a share currently… if you bought 100 shares… you would need to shell out over $37K… now, what happens if you’re wrong… and this news was going to damage BA’s business?

Well, if the stock dropped 40 points… you would be down $4K… heck if there was real panic selling… you could lose a whole lot more than that…

However, with the bull put spread, you know what your max loss is from the jump… and again, it’s limited because your position is hedged.

Options give you the opportunity to play stocks that seem too risky… by being able to structure trades and define your risk. That said, if you’d like to know more about options trading, make sure to download a copy of my latest eBook: 30 Days to Option Trading.

Bishop Recommends

“Never lose more than 2% of your entire account on any trade.”

That’s just one of the golden rules that has helped Petra Hess amass millions in trading profits.

She teaches her risk-averserules-based, and consistently-profitable strategy to new stock traders.

Join her latest webinar as she explains how to time your entries and exits.

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