New Trade – $BA Humbug

by CC September 18, 2015 1:52 pm • Commentary

Back on July 10th (here) we placed a defined risk bearish trade in Boeing (BA) and gave the following rationale:

U.S. multinationals have had no shortage of headwinds over the last year with the volatility of currencies and commodities being s constant push and pull on earnings. Now the uncertainty regarding the health of the global economy and the recent volatility in Chinese equity markets is weighing heavy on sectors with heavy international exposure, despite the S&P 500 (SPX) just 3% from its all time highs in May and up 1% on the year.

For those who are skeptical of this late week bounce in the SPX as Chinese markets stabilized and deal potentially in motion for Greece, it makes sense to look to fade the recent bounce in U.S. multinationals. Those stocks could offer weak forward guidance in the coming weeks as result of continued dollar pressure and the potential for weakness in China.

Since then, BA did offer lower than expected guidance. We’ve also continued to get weak data in China, and while the dollar has declined a bit, U.S. multi-nationals are still blaming the strength of the dollar for misses and guide downs (see FDX & ORCL) this week.

In 2014 BA got almost 60% of its sales from outside the United States, and 12% from China. It’s my belief that the FOMC’s lack of policy movement based on concerns about global growth has offered up a sort of mulligan for large U.S. mulit-nationals like BA to take down forward guidance.  The next identifiable catalyst for the stock is Q3 results on Oct 23rd.  The stock is not exactly expensive trading at 17x 2015 earnings that are supposed to decline 7% yoy, and 14.5x expected 2016 earnings growth of 17%.  But a weak EM and strong dollar will continue to be a headwind for company’s like BA and that we are likely to see forward guidance track the direction of emerging market currencies and equity markets.

Taking a quick peak at the chart since the start of 2014, the Triangle of Death is in full effect.  The breakdown below $140 last month, and the rejection at that level this week confirms what should be staunch technical resistance:

BA Since Jan 2014 from Bloomberg
BA Since Jan 2014 from Bloomberg

To drive home the importance of yesterday’s rejection at $140, the ytd chart (enhance!):

BA ytd from Bloomberg
BA ytd from Bloomberg

Given the volatility environment we are in, and the continued uncertainty, short dated options prices represented by the 30 day at the money implied vol of 23% looks fairly reasonable for those looking to express directional views via long premium options strategies:

BA 1yr chart of 30 day at the money IV from Bloomberg
BA 1yr chart of 30 day at the money IV from Bloomberg

Concerns of the Fed regarding the state of the global economy will not abate in a matter of weeks, and October, which will see the bulk of Q3 earnings for the S&P 500 as well as the FOMC’s next rate meeting could be a very volatile time. Similar to the month leading up to this week’s rate meeting.

We want to make a defined risk, long premium directional trade that will target BA’s 52 week closing low near $120, just above the August 24th intra-day low:

Trade: BA ($137) Buy to Open Oct 30th 135 / 120 Put Spread for $3

-Buy to open 1 Oct 30th 135 put for 3.80

-Sell to open 1 Oct 30th 120 put at .80

Break-Even on Oct 30th expiration:

Profits: between 132 and 120 of up to 12, with max gain of 12 below 120

Losses: up to 3 between 132 and 135 with max loss of 3 above 135


Vol isn’t that expensive considering what’s been happening to stocks with global economic exposure. This trade offers a good risk reward with 3 as a potential loss but 12 as a potential gain.