Considering Your Options – $BA: Taxiing To the Gate

by Enis October 9, 2013 10:36 am • Commentary

We have received a lot of questions on our BA Name That Trade post from a few weeks back, when we laid out a short term bearish trade when the stock was ~$119 due to its extreme overbought condition.  Now with the stock down ~4% and just 3 days left to the weekly expiration, and the stock just below the center strike of the Put fly, we think it makes sense to take profits on the trade.

At this point it is a bit of a market call, and I see 2 scenarios for the market.  First some sort of optimism that a double deal can get struck for shutdown and ceiling and stocks rally into the weekend, or that we continue on this path of uncertainty and we get weaker into the weekend.

With the trade right at the middle strike, the main benefit to holding would be that the middle strike options decay, and the stock does not move much away from $115.  But the VIX is now above 20, which implies much higher volatility than normal in the coming days.  As a result, holding here does not seem like good risk/reward, and I think it makes sense to take the money and run.

Action: Sell to Close BA ($115) Oct 1tth 120/115/110 Put Fly at 2.80 for a 1.51 gain




Original Post Sept 25th:  Name That Trade $BA – I Believe You Can’t Fly

We’ve written about BA twice in the past week, as the stock flew higher last week after breaking out to a new all-time high.  First, our CotD post on the 19th concluded:

The breakout last week led to continuation this week, but it’s the steepness of the ascent this week that is the real surprise.  BA’s RSI reading is actually hitting its highest level today since July 2007.

BA has traded like teflon this year, but the current move looks to be too emotional to be sustainable.  A move back to the breakout area near $110 would provide a much better long entry.  At the least, I expect BA to consolidate in the 115-120 area before any further advance higher.

Since then the stock has essentially stalled between 115 and 120, though it’s back closer to 120 yesterday and today.  Dan followed that post up the next morning with some comments on BA in his Morning Word post:

My sense is that you would be hard pressed to find to many other $90 billion market cap companies the world over that demonstrate this sort of extreme bullishness.  BA could be a perfect situation where those with fabulous gains consider replacing their long exposure with calls or spreads in an effort to define their risk going forward with the stock and the broad market at all time highs.

Implied volatility in the stock is fairly low, with at the money calls in Nov expiration (which will catch their Q3 earnings report) sporting only a 21 vol, which is basically inline with the 30, 60 and 90 realized volatility.

So the stock has become extremely overbought, but implied volatility is still quite low.  Moreover, the nature of BA’s move resembles a hard-to-value tech stock rather than a staid, mega-cap defense and aircraft conglomerate.  As we approach the end of the year, this is the type of name where fund managers might be willing to reduce exposure and lock in some gains and switch to other stocks that offer better risk/reward.

One last point.  Implied volatility in October for the entire market seems too low to us given that Treasury Secretary Lew has indicated that October 17th is the date to watch for the debt ceiling.  That political debate still has many weeks to run, and with it, more headlines.  BA won’t be directly affected by this debate, but for a high flying stock with implied volatility low, we like the following trade:

NAME That TRADE: BA ($118.95) Bought Oct11th 120/115/110 Put Fly for $1.29

-Buy 1 Oct11th 120 Put for 2.65

-Sell 2 Oct11th 115 Puts at 0.80 each or 1.60 total

-Buy 1 Oct11th 110 Put for 0.24

Break-Even on Oct11th Expiration:

Profits: btwn 118.71 and 111.29 make up to 3.71, max gain of 3.71 at 115.

Losses: up to 1.29 btwn 118.71 and 120, and btwn 111.29 and 110, with max loss of 1.29 below 110 and above 120.

Trade Rationale:  BA is severely overbought, but its momentum has slowed in the last few days as it has stalled around 120.  The risk/reward of playing for a pullback here without paying too much premium is attractive to us.  We didn’t do this trade ourselves since we already have a lot of shorts, but wanted to lay out the structure for those interested.