Boeing Co (NYSE:BA) reported earnings this morning, and traders loved it. Boeing stock is now up 80% off the 12-months lows. So can I chase this rally, or is it too late to get in? Yes, I definitely can chase BA stock and no, it’s not too late to get in.
BA doesn’t have many direct competitors and maybe that’s a contributing factor in this amazing long-term ascending trend. But still, its 28 price-to-earnings ratio is reasonable among the industry and also in absolute terms. Barrier to entry is huge and unless management commits a colossal snafu, bulls will buy every dip if and when they come.
Click to Enlarge Even in a beautiful trend like BA’s, I am still not one to buy and hope for higher prices. I prefer to sell risk and let time earn me my money while I relax on the beach.
So do I stay out and pray for a dip off the highs? No, this could mean that I’d be waiting for eons before this happens.
Technically, BA stock sports an insanely constructive ascending trend with hardly any dips, and those that come are shallow and catch an immediate bid. Selling puts for income makes most sense against uncertainty, but in some cases like this, it also makes sense to do it into consistency.
I will leverage the value in Boeing stock and sell downside risk against it. The trick is to find levels that will likely be support even through potential trader tizzies. I also have to account for the possibility that markets in general could correct a little off the all-time highs into the fall season.
BA Stock Trade Idea
The Bet: Sell BA Jan 2018 $160 put to open the risk and for that I collect $1 per contract. Here I have a 90% theoretical chance of price staying above my strike, so I retain maximum gains. But if BA falls below, then I must own it at the strike price and suffer losses below $159. This worst-case scenario wouldn’t be too bad — buying the shares at a 30% discount from here. Compare this with needing to risk $228 at face value to own the shares then hope for higher prices.
Not everyone is willing to own BA shares, and for those people I would sell spreads instead. I can still profit in a similar fashion but with much smaller risk size because I sell to open my put risk but I also buy equal number of puts below thereby capping my exposure.
The Alternate Bet: Sell BA Jan 2018 $175/$170 credit put spread where I have slightly smaller chances of success but with much less money at risk. However I don’t like the yield it offers now, so I may need to move it higher if premium doesn’t improve.
There are no guarantees when investing in the stock market, so I never bet more than I am willing to lose.
Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
