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The Boeing Company (BA) Option Bulls See Clear Skies Ahead

Analyzing a long-term call spread on BA

by 2/8/2013 9:10 AM
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The shares of The Boeing Company (NYSE:BA - 77.43) ascended to one-month highs on Thursday, and some option traders are expecting even more long-term upside for the blue chip. During the course of the session, BA saw roughly 57,000 calls change hands -- almost double the norm. Meanwhile, around 14,000 BA puts crossed the tape, well below the stock's average daily volume of about 23,000 puts.

Digging deeper, most of the action transpired at the January 2014 85 and 95 strikes, which saw symmetrical blocks of 9,700 calls exchanged. The 85-strike calls crossed at the ask price of $3.25, suggesting they were bought, while the 95-strike calls traded at the bid price of $1.10, implying they were likely sold. Since open interest skyrocketed at both LEAPS strikes overnight, we can assume the trader implemented a bull call spread for a net debit of $2.15 per pair of options.

By purchasing the 85-strike calls, the trader expects BA to perforate this strike by early 2014, when the LEAPS expire. However, to help fund the bullish position and limit risk, the speculator sold the higher-strike calls. As such, the investor will profit if BA topples the $87.15 level (bought strike plus net debit), as opposed to $88.25 (strike plus premium paid) with the "vanilla" 85-strike call purchase. Furthermore, the spread trader's maximum risk is capped at $2.15 (net debit), as opposed to $3.25.

On the flip side, the sale of the January 95 calls limits the speculator's maximum potential reward. Specifically, the investor can make up to $7.85 (difference between strikes minus net debit), no matter how far BA should rally north of $95. Had he simply bought the 85-strike calls, his profit potential would be theoretically unlimited.

From a sentiment standpoint, bullish betting is relatively rare for BA these days, thanks to recent struggles with the Dreamliner 787. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.61 ranks in the 69th percentile of its annual range, implying that option buyers have picked up BA puts over calls at a faster-than-usual clip during the past couple of weeks.

Likewise, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.94 stands higher than 72% of all other readings of the past year. In other words, short-term options traders are more put-biased than usual at the moment.

Yesterday, however, investors may have been cheering a successful flight of the aforementioned Dreamliner, marking a one-time exemption amid the fleet's FAA grounding. In addition, Boeing's progress with battery design changes could have the passenger jets up and running again as soon as March, according to a Wednesday Wall Street Journal report.

Ahead of the bell today, the shares are flirting with breakeven, even as industry data showed Boeing edged past European rival Airbus in both orders and deliveries last month, despite the Dreamliner drama.


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