New Trade $BA: If History Is A Guide, The Trade Is to Fade The Paris Air Show

by Dan June 17, 2013 10:21 am • Commentary

When I wrote this hypothetical trade up on Friday, my apprehension at the time was too press the short on a down day in the market, and as the stock had reversed 1.5% from the morning’s and the all time highs.  With BA up this morning, I am going to use the opportunity of a new high which coincides with the first day of the Paris Air Show to initiate the trade. We’ll keep a tight stop of about 50c on this in case the market is off to the races this week and takes BA even higher with it. On the flip-side, we’ll look to take profits quickly in the name with any quick move back to or below 100 in the stock:  

Trade:  BA ($103) Bought July 100 / 95 Put Spread for 1.00

-Buy 1 July 100 Put for 1.70

-Sell 1 July 95 Put at .70

Break-Even on July Expiration:

-Profits of up to 4.00 btwn 99 and 95, max gain of 4.00 below 95

-Losses of up to 1.00 btwn 99 and 100, with max loss of 1.00 above 100.

Payout Diagram:

Screen Shot 2013-06-17 at 8.15.30 AM



Original Post June 14th, 2013:  Name That Trade:  $BA – Up In The Air

I am going to keep this one really simple. BA has defied all critics, simple logic and gravity in 2013.  The stock is up 35.5% this year, trading at all time highs despite spending much of the year with their Dreamliner grounded. I have no strong view on the company’s fundamentals and on a pure valuation basis the stock price seems reasonable despite the monster rally.  BA is trading at a market multiple on earnings that are expected to grow 23% this year and 12% next. Back in December the company raised their dividend, which now yields 1.9% and suggested they will complete their $3.6 billion share repurchase authorization by buying btwn $1.5 and $2 billion worth of stock in 2013.  If they aren’t buying up here, they are sure to have support lower on pull backs.  

Having said all that, I am a trader, and all of the excitement into Monday’s Paris Air Show with the stock a couple percent from all time highs got me thinking about a research note from Merrill Lynch (below) highlighting BA’s (and other airline manufacturers) price action into and out of the show, here were my main takeaways:

Since 1995 in the 30 days prior to the Paris AirShow, BA has been up on avg 9.7% and up 7.5% vs the SPX.

In the 15 Days after the Paris AirShow since 1995,  BA has been down on avg 1.9%, and down 3.3% vs the SPX

This year BA has been up ~10% since May 3rd (30 trading days), in contrast, the SPX is only up 2% during that time.

Technicals: The stock is 27% above its 200 day mva. That hasn’t happened in more than 10 yrs. Any play for a pullback should target the 50 day moving average which right now is just below the 95 strike:

from Bloomberg


Volatility: Like we’ve seen recently with other stocks that have broken out to the upside, BA’s vol has actually risen with into its new highs. That shows the level of concern these moves have cause for investors afraid of a pullback. Here’s a look at the IV30 (red) over that past year:

Screen Shot 2013-06-14 at 10.35.34 AM
from LiveVol Pro


MY TRADE: With BA down ~1.5% from this morning’s highs, and with what I think could be excitement on any big order announcements early next week, coupled with a market that could be predisposed to rally into Wednesday’s FOMC meeting, I want to lay out a bearish strategy that I want to put on early next week on strength.

Theoretical Trade:  BA ($101.75) Buy July 100 / 95 Put Spread for 1.25

-Buy 1 July 100 Put for 2.15

-Sell 1 July 95 Put at .90

Break-Even on July Expiration:

-Profits of up to 3.75 btwn 98.75 and 95, max gain of 3.75 below 95

-Losses of up to 1.25 btwn 98.75 and 100, with max loss of 1.25 above 100.

Payout Diagram:

Screen Shot 2013-06-14 at 11.42.39 AM
from TradeMonster

Pretty simple play here as I’m looking for some weakness in the stock following/During the Airshow. I’d look to take profits on a move below my long strike. 95 Seems to be a realistic level for a pullback if it comes.


Here’s the Merrill report:

Air Show Trade