Name That Trade – $BA: Playin’ With Fire

by Dan July 18, 2013 3:02 pm • Commentary

About a month ago I put on a bearish trade in BA (below) as the stock was making new multi-year highs heading into the Paris Airshow, following a seasonal pattern of rallying into the event and giving back gains afterwards.  I got a bit lucky with trade as the broad market certainly help cause a quick decline and I closed for a quick gain, but since then the stock has been particularly volatile.  Last week’s fire on board a Dreamliner at London’s Heathrow Airport sparked investor worries about the potential for a second grounding of the airplane this year if the event was linked to the previously plague battery packs.

News today that the fire was likely the result of a faulty beacon made by Honeywell, and not related to the batteries has sent the stock back up towards the all time highs, where the stock was last Friday prior to the event. Here’s more color from industry publication ATW:

The UK Air Accidents Investigation Branch (AAIB) has recommended that the Honeywell emergency locator transmitter (ELT) on all in-service Boeing 787s be temporarily made “inert” following a fire on board an Ethiopian Airlines 787-8 last week at London Heathrow Airport.

In a special bulletin issued Thursday, the AAIB said the fire damage suffered by the Ethiopian 787 coincided with the location of the ELT and its related wiring. “There are no other aircraft systems in this vicinity which, with the aircraft unpowered, contain stored energy capable of initiating a fire in the area of heat damage,” the bulletin stated.

“It is recommended that the Federal Aviation Administration [FAA] initiate action for making inert the Honeywell International RESCU406AFN fixed emergency locator transmitter system in Boeing 787 aircraft until appropriate airworthiness actions can be completed,” the AAIB bulletin said.

So they’ll be turning off the emergency locator. There, they fixed it.


What’s interesting to us from a stock perspective is this morning’s gap was to the ’07 highs but was sort of just news confirmation of what had caused to stock to recover all its losses after the Heathrow fire already, namely, that it wasn’t the same battery problem that grounded the fleet earlier. Here’s what the stock did since Heathrow, traders decided pretty early on that this wasn’t the same problem:

Screen Shot 2013-07-18 at 12.31.44 PM
from LiveVol Pro

From purely a technical standpoint, this year’s breakout of a 3 year consolidation, in the face of the continued negative news flow on the Dreamliner front is nothing short of heroic.

BA 6yr chart from Bloomberg
BA 6yr chart from Bloomberg


Earnings in BA are on July 24th so it’s difficult to play for anything other than a quick reversal off of the highs and a bit of a sell the news scenario. So I wanted to share some of the structures we looked at in this name today.

The first thing we looked at was some sort of quick reversal play using weekly options (expiring tomorrow) like the 107/105 call spread for about 50c. This isn’t how we trade on the site but that’s a play that doesn’t need much of a reversal (below 105 tomorrow) to be worth 4 times what was paid. But it is basically day trading.

The other structure we looked at was selling the 105/110 call spread in August at about 2.50. The thinking behind this structure is that we’d be net short a little premium (with stock at 107 about 50c worth) and it’s something that if the stock reversed off its highs we could cover for a decent profit below. The problem with this trade is earnings next week. If the stock doesn’t immediately reverse, we’re stuck with a position that’s was meant for a short term trade, but then has to be either closed or let ride through an earnings announcement. Vol wouldn’t help much on that either as it’s likely to continue to rise into earnings and most of the short deltas are intrinsic anyway.





Trade Update June 24th, 2013 at 12:24pm:   With BA down 6% in a week since placing this near term bearish bet, I am going to take my profits and move on as the stock could find some support at the 50 day moving average less than a percent from current levels.  The trade was to fade the Paris Air Show excitement and that’s exactly what we did.

Action: BA ($96.97) Sold to close July 100 / 95 Put Spread at 2.50 for a 1.50 profit.

As we have been staying in our commentary we are looking to trade here, we are not looking to hit home-runs and catch the big one, we are looking to hit singles and doubles and in one week I would consider this trade to be a solid stand up double.  On down days like today we are taking off a short or two, spreading outright puts and looking to maybe add an oversold name…..



Original Post June 17th, 2013:  New Trade $BA: If History Is A Guide, The Trade Is to Fade The Paris Air Show  

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.



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