MorningWord 7/23/13: Dreaming of Post Earnings Vol Crush – $BA

by Dan July 23, 2013 9:25 am • Commentary

MorningWord 7/23/13:  Boeing reports Q2 earnings before the open tomorrow morning.  The options market is implying a ~2.77% move, which is rich to the 4 qtr avg of ~1.8% and the 8 qtr avg of ~2.28%.  It is interesting to note that in the last 8 qtrs, BA has beaten the consensus estimates in each period with the lowest margin of 8%, and the stock was up 7 out of 8 days following the results, and the one down day was 15 bps.

We looked at BA in a Name That Trade post (here) last week after the July 12th sell off relating to the 787 fire in London and contemplated bearish positioning as the stock once again approached the previous highs, but decided to wait until the earnings event.  2013 is shaping up to be a slightly different year than most BA investors had hoped for, at least from a headline standpoint.  Heading into 2013, BA was expected to be riding the tailwinds of leverage of wider 787 production resulting in declining production costs & increased cash generation and thus expanding their $1 -$2 billion share repurchase, but instead they got grounding of the new plane and a whole host of incidents that have caused some to question whether or not BA may have a real problem with the Dreamliner.  I don’t mean to sound alarmist by any means, but a question I have asked a few market participants of late, how many more incidents with the Dreamliner before the plane is grounded again?  Even the most bullish on the name agree that the near term margin for error isn’t great.

The stock once again approaching all time highs suggests that equity investors have little concern for a second grounding anytime soon, but the chart below of 2 year 30 day at the money implied volatility (blue line) vs the 30 day realized volatility (white line) shows a tad more concern.  Now obviously, IV saw a spike on the day of the Ethiopian Air Fire, and remains elevated into tomorrow’s earnings event, but with the VIX once again approaching 52 week lows, BA IV is priced for movement.

BA 30 day IV (blue) vs 30 day realized  vol (white) from Bloomberg
BA 30 day IV (blue) vs 30 day realized vol (white) from Bloomberg

With this backdrop, and the stock at all-time highs, a large vol crush after the earnings event might set the stage for some interesting options structures that anticipate continued volatility and headline risk.  Specifically, we’re watching the 18-20 area in implied volatility as a potential buy area.  But for now, we wait for the resolution of the event.