Long BA

Discussion in 'Options' started by nitetrader, Sep 9, 2007.

  1. Hi,

    Im sorta new to options trading and am currently bullish on BA.
    I am quite certain it will retest its previous high at around 105 before the
    end of September and am wondering what would be a good risk/reward
    strategy to accomplish a decent profit if i am right.
    A bull call spread or just buy straight calls?

    Would appreciate any advice thankyou.
     
  2. Check out a good option book or web site to compare the two strategies and plot out some what ifs with current premiums to see how the numbers line up. Acceptable risk/reward is a personal thing.
     
  3. Hi and welcome to ET
    Have a look at the impl volatility graph (ivolatility.com) and see where iv currently sits. If it's in the lower 20% of the one year iv range then you could just buy a straight option. If it's higher then buy/sell the spread. Then of course you need to decide which strike(s) and expiry to pick. As spindro said, plug some variables into a model and see which spreads/straight options give you the rr you want AND conforms to your prognosis for BA.
    Cheers
    db
     
  4. tvgram

    tvgram

    That seems a very short time frame, and I am not a pro, but I can at least I plug those parameters in my software (target of the underlying stock price moving to to $105 by 9/30/07, no overall change in volatility levels, looking at all covered strategies using $1,000 of capital) and the top two trades (based on expected return if those expectations come to pass) that came up were the following (look at attached graph that compares all three):

    Long Calls - Red Line:
    Buy 9 October 105 calls @ 1.10 (the current asked price)

    Vertical Debit (Bull Call) Spread - Blue Line:
    Buy 11 October 105 calls @ 1.10 (the current asked price)
    Sell 11 October 110 calls @ 0.25 (the current bid price)

    Of course your other choice for that same $1,000 is to just buy 10 shares of stock (not using margin) - the Green Line.

    Note that I am not saying this is a good idea. I personally do not follow BA very much (even though they did move their headquarters here to Chicago).

    But the roughly 16% chance (based on the current lognormal distribution) that the stock price will finish above $105 on 9/30/07 along with the 29% probability of profit (meaning you at least get $1,000.01 back, not that you make a killing) is really just a short term gamble. Note that if you buy those calls and the stock price ends up about the same as it is now on September 30 you will lose about 80% of your capital.
     
  5. Don't forget about the alternative of selling a naked Put.

    It's probably not as exciting or as potentially profitable as the other ideas, but it's probability of success is likely higher (depending on strike choice).

    Don
     
  6. A beginner selling a naked put?! Surely, with all due respect, you can't be serious.
    db
     
  7. Why not? It's probably the best place for a beginner to start. As you likely realize a short NP is the equivalent of a covered call and I think that's safer than outright stock ownership.

    The only caveats I would give is do not use leverage; i.e, have the cash to buy the stock if assigned. Also only sell as many puts as you would be willing to own shares in the associated stock.

    Many brokers limit beginners to covered calls because they are not very risky. Again a NP is the equivalent of a CC.

    Don
     
  8. Lots of great info here guys thanks.
    I guess i was a little optimistic with my price target.
     
  9. I'm guessing more like 101.
    Textbook h&s is appearing which will probably mean a big move down to
    81 territory.
    Oh well... 94 to 101 is still decent
     
  10. tvgram

    tvgram

    Did you see the article today in the front section of the Wall Street Journal that talks about how past production problems and shortages now mean the 787 Dreamliner is on the tightest schedule ever attempted for the testing/ launch.

    They talk in the article about how everything in this complex program must go exactly right for passing testing, in production, and for all their subcontractors, and that even small things could cause a chain reaction that could delay delivery, perhaps as long as two years.

    As I mentioned, I don't follow BA all that much, but I do know that sales have been very good for this plane, and I wonder how much future earnings is dependent on this plane and if the stock is priced expecting flawless execution. If so, delays (and the accompanying delayed sales and not too mention fines for failure to deliver to airlines on time).

    Anyway, just thought I would mention it case you hadn't seen the article.
     
    #10     Sep 17, 2007