Monday, April 7, 2008

Straddling an Airplane

I have written posts in the past about utilizing my favorite options strategy, the straddle , when big news is due to be released.

In the past, I have set up a straddle (or strangle, which is a sort of higher-volatility straddle) before big oil news like OPEC supply decisions. I've used them on Chevron and ConocoPhillips in the past, reaping decent returns.

For those who may not know, a straddle is done by purchasing (or selling, but I always purchase) both a call and a put option at the same strike price for one security. The bet you are placing is that the stock will trade wildly - it doesn't matter in which direction, it just has to move.

In the last hour of trading today, I set up a straddle on Boeing (BA). Today they said that the would be updating Wall Street on the progress of their Dreamliner jet on Wednesday.

The Dreamliner promises to be the best plane on the market, but first-flight and delivery dates have already been pushed back. Many analysts expect the delivery date (or at least the bulk of total deliveries) to be pushed back. (Much of this has to do with the high-tech nature of the plane, as it is apparently hard to source the many specialized components.)

Anyway, right as BA was trading around the $75 mark, I bought an equal amount of April $75 calls and puts. The total cost for each 1call/1put straddle was $310 (including commission).

So, for this trade to be successful, Boeing has to move more than $3 up or down between now and April 18th. (If it jumps after the announcement Wednesday, there will still be some time value left, but much of that $1.50 price is the manifestation of the volatility due to the announcement).

So I don't know if the news will be good or bad on Wednesday, but that doesn't matter. I just think that it'll send the stock up or down more than 5% over the next two weeks. As long as something important or controversial is said, then this trade should yield a nice return.

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