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
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