BA: Boeing Boeing Gone?

by Dan January 26, 2016 2:05 pm • Commentary• Trade Ideas

Event: Boeing (BA) reports Q4 results tomorrow before the open. The options market is implying about a 4% one day move, which is rich to the 4 qtr average one day move of 2.5%, and the 10 year one day average move of about 2.7%.  

Price Action / Technicals:  BA is down 12% of the year, almost double that of the SPX’s 2016 loss so far of 6.5%, and down about 20% from its 52 week and all time high made in Feb of 2015.

Last Wednesday BA bounced off of massive technical support at $120, with little overhead resistance until the high $130s:

[caption id="attachment_60643" align="aligncenter" width="600"]BA 4 year chart from Bloomberg BA 4 year chart from Bloomberg[/caption]

Options Volatility SnapShot:  30 day at the money implied volatility is very elevated in BA, trading at levels well above the prior 4 earnings events. What’s clear here is that long premium directional trades into tomorrow’s report will be a tough way to make money:

[caption id="attachment_60645" align="aligncenter" width="600"]BA 1yr chart of 30 day at the money Implied Vol from Bloomberg BA 1yr chart of 30 day at the money Implied Vol from Bloomberg[/caption]

Implied vol after the event should fall back at least to the mid 20s.

MY TAKE INTO THE PRINT:  [private]  BA is in the midst of a $12 billion share buyback which they announced in late 2014 and they pay a dividend that currently yields 3.4%, trading at 17x trailing 12 month earnings and 13.5x forward eps estimates.  The problem here is that consensus is calling for a 14% drop in the year just ended, but a meaningful 28% bump this year.  There is some of the recent commentary regarding 747 cuts (here), but the big story is about Dreamliners, and that was reflected in the ramp in the stock in 2013, the year that saw 38% eps growth .

Given the fact that some of the news is out, the market has taken it in stride, without a meaningful cut to 2016 guidance, the stock could breathe for a bit after results, possibly to the mid $130s.

What’s the Trade?  The implied move is about 4% or about $5, for those looking to play directionally, calendars could make sense, selling a weekly option, and buying a longer dated one. If you get the direction correct, and the stock does not overshot the implied move, then the trade should be a winner.

Trade Idea: Buy BA Jan 29th weekly / Feb 19th 133 call calendar for $1:

-Sell to open 1 Jan 29th weekly 133 call at at .50

-Buy to open 1 Feb 19th 133 call for 1.50

Break-Even on Friday’s close:

Max gain at $133, the Jan weekly call will expire worthless if below 133, and the Feb 133 call, while seeing a vol crush adversely affecting its value will have gained deltas from the move up in price, now a 3 week options at the money, or about 50 deltas, which should be worth about $3.

-Worst case scenario is that the stock has a sharp drop below current levels, or rallies well above the strikes, at that point the max risk to the trade is the $1 in premium spent.