A Bet That Boeing Won't Soar

03/11/2013 8:00 am EST

Focus: OPTIONS

Mark Sebastian

Founder, OptionPit.com

There is an increasing amount of call buying, which implies a large upcoming move in Boeing, but Mark Sebastian of OptionPit.com, thinks that’s already “baked” into the price, so he offers this play.

Boeing continues to rally ahead of an important NTSB decision on the safety of its battery system within its new 787 Dreamliner, but why? Considering BA is nearing an all-time high, it seems likely the market has already “baked in” the idea that the NTSB will eventually approve the system.

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Ahead of the decision, there is an increasing amount of call buying, which is running up implied volatility. With increasing prices and IV, perhaps traders should consider the idea that the stock price won’t continue to rocket higher, but rather stay at or near current levels. Additionally, we broke through resistance at 78, and it looks as though we will close for a second day above that level.

chart
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Click to Enlarge

Traders bidding up calls would imply a large move in the underlying. Since we believe a lot of the NTSB decision is priced into the market, we are not anticipating such a move in either direction. As such, we want to sell movement (gamma) since we think vol is too high. That said, we don’t think BA is going to drop, we are going to play BA not moving or creeping higher.

The Trade
We like selling the April 80/77.5 put spread collecting between 70 and 75 cents a spread.

By Mark Sebastian, Blogger and Contributor, OptionPit.com

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