Boeing Co (NYSE:BA) has been one of the best-performing stocks in the Dow Jones Industrial Average so far this year, rising nearly 8.5%. On an intermediate term basis, the rally has been even more impressive, with BA stock rising some 20% over the past two months.
The reaction post-earnings, however, was rather tepid. This may signal that the rally in Boeing stock may encounter some turbulence and consolidate over the coming month.
In the latest earnings report on Jan. 25, Boeing beat both earnings ($2.47 actual versus $2.34 expected) and revenues ($23.3 billion versus $23.1 billion expected). Boeing stock initially jumped on the earnings news, trading to an all-time high of $170 before pulling back sharply.
Click to Enlarge This type of price reaction post-earnings is usually emblematic of a short-term top in the stock, especially following such a sharp rally.
Given the recent rally, BA stock is no longer trading at a cheap multiple. With a price-to-earnings ratio now over 22 on a current basis and over 16 on a forward basis, I expect Boeing stock to have difficulty rallying significantly from current levels given the comparatively rich valuation.
Click to Enlarge In a note from Monday, Buckingham Research downgraded BA from “neutral’ to “underperform” with a $140 price target. Goldman Sachs had previously issued a “sell” rating on BA stock with a $124 price objective. Certainly the analysts are decidedly mixed on Boeing going forward, with a consensus price target of $173.70. This lack of consensus should provide fuel to consolidation thesis going forward.
A big benefit of using options versus stock is the ability to position and profit from sideways action. So to position for a period of consolidation, an out-of-the money bear call spread makes intuitive sense to me, especially given the recent price action and extended valuations.
BA Stock Trade Idea
Sell BA March $175 calls and buy BA March $180 calls for a 60-cent net credit or better.
Maximum gain is $60 per spread with maximum risk of $440 per spread. Return on risk is 13.6%. The short $175 strike price is positioned $3.85 above the Tuesday closing price of $168.50 and also above the resistance level at $170.
I would look to close out the trade on a meaningful break above the $170 level while hoping to have the spread expire worthless and keep the initial credit if BA remains well-behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
