Earlier this year, Boeing regaled investors. The company made airplanes, which are far less chic than fast-growing technologies, but anyone who bought Boeing’s stock effortlessly made money.
For ages, the company (ticker: BA) was one of the top-performing stocks in the market. The investment seemed safe due to a massive backlog of orders that seemingly secured the stock’s valuation.
And then a Boeing 737 Max crashed one March weekend in Ethiopia, after an earlier crash of the same model jet in Indonesia. When the market opened the following Monday, all of the assumptions about the company began to decay. The order backlog that was so critical to Boeing’s investment theme turned out to be primarily for the type of plane that just crashed, and those planes were grounded all over the world.
The stock—which had set an all-time closing high around $440 on March 1—has since struggled, falling to a recent $352. Investors are afraid, as are fliers, that Boeing’s next-generation 737 Max, which was supposed to be the next great iteration for Boeing, simply isn’t safe.
While Boeing has recently apologized for the crashes, these larger issues will take time to clear. Meanwhile, investors are now starting to gather round Boeing stock for tactical reasons that have everything to do with how Wall Street handles key events and not much of anything else.
As the G-20 prepares to meet in Osaka, Japan, on June 28-29, Boeing is emerging as a key event-driven trade. The company, after all, is America’s largest exporter, and China is a critical market with an appetite for airplanes. President Donald Trump is expected to meet Xi Jinping, China’s president. Boeing’s stock could jump if something positive is said about a trade dealafter the meeting.
To trade the G-20 meeting with Boeing, investors can buy a July call optionthat is slightly above the stock price. If the stock rises more than the cost of the call, and the stock is above the strike price at expiration, the trade will be profitable. Should the stock decline and be below the call strike price at expiration, the money spent on the call is lost. Calls increase in value when their underlying stock rises in price.
Investors who want to take advantage of Boeing’s low price—say, to average down the of stock bought at higher prices, or to speculate that all the bad news is factored into the stock price—can sell put options that are 5% to 10% below the stock price and that expire in three months. Puts increase in value when their underlying stock falls in price.
If the stock remains above the put strike price at expiration, investors pocket the premium. Should the stock be below the strike at expiration, investors must buy the stock or cover the put at a higher price, which is the key risk.
There is no deep, penetrating insight to these event-driven trades. The trades are much like the Wall Street equivalent of buying scratch-off lottery tickets. If you win, the payoff is often quite nice, and if you lose, who cares? The call didn’t cost that much anyway.
Steven M. Sears is the chief investment officer at StratiFi Technologies.
Originally Posted on June 11, 2019
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Barron's and is being posted with permission from Barron's. The views expressed in this material are solely those of the author and/or Barron's and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Options Trading
Options involve risk and are not suitable for all investors.
For more information read the “Characteristics and Risks of Standardized Options”. For a copy, call 312 542-6901.