New Trade- $BA : Fiscal Cliff Not Resolved Just Yet

by Enis November 27, 2012 12:58 pm • Commentary

As negotiations start to heat up, many of the previous fiscal cliff trades have been tossed aside.  The market feels confident that a deal will be reached, so on to the next trade, right?  I doubt it, seems a bit too complacent to me.  A deal will likely be reached, but we are still quite far away from knowing the details of that deal.  In the interim, I expect the uncertainty from the negotiations to start reflecting in stock prices once again.    

Boeing is one name that I’ve been watching, since it’s about 50% domestic sales, and about 50% of the business is defense (the other 50% commercial airplanes).  Boeing has been on my radar since they announced a “restructuring” a couple weeks ago (I’ll address why restructuring is in quotes in a bit).  The stock caught an immediate bid, and hasn’t seen the $70 level since.  Sure, it’s been helped a bit by the broader market’s rally, but there were a lot of new buyers who gained confidence from the company’s announcement.  Here is the 1 year chart:



I’ve drawn the 200 day moving average in gray, now sitting at 72.80, in the middle of the range between 68 and 78 where the stock has traded for essentially the entire year.  It’s a 15 P/E stock with 6% projected growth for next year, and a 2.4% dividend yield.  You can see the large volume rally that occurred on Nov 9th, and the stock is trading at the high end of the past 6 months.

The recent rally on “restructuring” reminds me of what happened in FDX in October.  Here is the 6 month chart for FDX:



FDX saw a high volume rally on Oct 10th as a result of its own “restructuring” announcement.  But over the next month, that rally petered out, and the stock is trading back below its 200 day ma.

When I hear “restructuring” announcements from these large multinationals, I tend to view it as a euphemism for declining sales rather than a positive announcement about cost cuts.  Of course, any company will want to keep costs down.  But it’s a big difference between striving for efficiencies and being forced to cut costs as revenue declines.  In my experience, “restructuring” tends to fall in the second bucket, indicating more negative future prospects.

Along those lines, I expect some weakness in BA over the next couple months.  However, the mere prospect of a deal should make for choppy back and forth trading in December.  So I don’t want to take a pure bearish put trade and watch my premium decay on the chop.  That’s why I chose the calendar:

Trade: BA ($74.30) Bought Dec / Jan13 72.5 Put Calendar for $0.69

-Sold 1 Dec 72.5 put at 0.69

-Bought 1 Jan13 72.5 put for $1.38


Trade Rationale:  I chose the calendar because Dec and Jan13 are priced at almost the same implied volatility, when I think the implications of a deal won’t be known before Dec expiry.  There is still a lot to be worked out in the next month, so I expect Jan13 is much more likely to capture any volatility from the deal implications.