Long Calendar Spread Reduces Cost In Boeing Shares
Boeing (BA) has certainly stood out in the news in recent weeks, and its run-up even got attention on Friday’s IBD Live show. So in today’s trade, we’ll analyze a long calendar spread trade in Boeing stock.
As we remain invested in the markets into and beyond the weeks ahead following the market trend analysis in IBD, the calendar wheel continues to deliver upside profits even without adjustments. As one example, see the most recent article on a Home Depot (HD) calendar spread. The calendar wheel allows for market gyration and still keeps us open to unlimited upside if price action remains bullish.
As for Boeing, what a volatile year for sure. As it sits after a huge run, to me the stock today looks a little toppy. But it also may hold a fair bit of upward runway.
I remain confident that selling premium helps us navigate into the best entry point, even in the jagged formations and whipsaw. To replicate what I am doing here for yourself and to strengthen our rationale, focus on the monthly charts with calendar spreads. I find the longer formations very reliable as we are carrying positions for months.
Boeing Stock Today: Setting Up A Calendar Spread
Within the option toolbox, the long call calendar spread is a neutral-to-bullish position. It estimates that the near-term prices are within a range but will rise over the longer term.
Let’s set up a long calendar spread in Boeing stock in the following manner:
Sell to open 1 BA Jan. 19-expiration call with a 250 strike price
Buy to open 1 BA March 15 250 call
Total debit comes out to $5.58 per share per set of contracts, based on recent trading. This means we calculate a break-even cost at 255.58. That is, take the price of the long option strike in Boeing stock plus the strike of the option. Because their strikes do not expire at the same time, I will always refer to these as calendar spreads.
The ideal strategy gives us two choices to exit the trade.
First, you could sell the entire calendar spread once it carries an acceptable profit, then you can cover it for tidy gains and be on to the next one. Please note that the Home Depot trade noted above is well above 60%, even if you don’t enjoy learning to manipulate the option strikes.
Two, you could also roll the short contract into the following month before the current short call expires. Using the Home Depot example again, you can buy back December’s short call that is in the money and sell the same 310-strike option for Jan. 19, 2024. This will give you a credit and will reduce your break-even point substantially. If you are uncomfortable selling the January call in the money, you can choose another that fits your risk profile better.
Please note the cost of the calendar will increase if you move the strikes further out of the money.
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic situation. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
Buying a calendar spread assumes price action will be somewhat sideways to up (in our current configuration) in the short term but it will break out to the upside once we get to the strike of the furthest month closer to expiration. In this case, it is March. Options sellers are positioned to win in two ways: the stock does nothing, or it moves within the ranges. We use this concept to minimize the risk of market exposure.
Boeing Stock: Managing The Options Trade
First, let’s identify key chart levels in Boeing stock.
The monthly resistance zone sits near 350, and support sits near 244. If we see some sharp dips, we will be in position to move the options to collect premium.
Scenarios for the BA long call calendar spread:
Boeing stock grinds lower from the top but does not break the $180 price for more than three days. Such action shows as favorable to traders looking for longer-term growth. Look for bounces in the days following to confirm the strength of the chart.
BA grinds higher much earlier in the cycle and the option position increases in value by more than 50%. In this case, we could certainly choose to sell the entire position and quickly take the gains. This frees up more capital to trade.
Stock grinds higher but does not break the $250 price for more than three days. This shows traders are not willing to pay more for Boeing stock at the present time. We can continue to sell premium against the strike in March.
Boeing stock breaks down on volume for more than three days and breaks our personal risk thresholds. We exit the trade. Be patient when we get close to the strike price; patience will pay off in these formations. This becomes markedly more important the closer we get to expiration.
Stock holds price within the range of our short strike before each prior month’s expiration until finally, all we hold is the long March 250 call. This way we can sell two months of premium, potentially making our break-even level in Boeing stock well below 250, and with unlimited upside.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of “The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology.” She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades