Shares of Boeing (NYSE:BA) plunged 2.5% on Friday on news that U.S. regulators are conducting a comprehensive review of the 787 Dreamliner. The announcement comes on the heels of several technical problems suffered by Boeing’s latest passenger jet. Fearing the potential outcome to such an investigation, many investors are taking a “shoot first and ask questions later” approach by unloading shares from their portfolios.
But emotional overreactions of traders often generate profitable opportunities — so let’s investigate BA a bit further to see if there’s a trade to be had.
The first thing that strikes me when assessing the price action of Boeing over the past year is its utter lack of mojo. It’s essentially been mired in a trading range between $70 and $77 despite a few attempts to break out and start trending. The latest challenge of the $77 resistance level was quickly stymied when BA fell 4.5% on Monday and Tuesday last week in response to the aforementioned battery fire.
On the bright side, the selling bonanza in BA has yet to break any key support levels, and the stock it still remains above a rising 50-day moving average.
Not surprisingly, demand for options is on the rise as investors flock to the derivatives market in search of protection and other low-risk bets to game the recent spate of bad news.
On Friday, put volume outraced call volume with 22,227 puts being traded versus 15,715 calls. As shown in the accompanying vol chart, the uptick in demand has driven 30-day implied volatility (red line) up from 21% to 23%, which is the upper end of its six-month range … though, admittedly, it’s still a far cry from its 52-week highs of 32% during the stock’s sharp downturn in May 2012.
With IV now sitting atop its six-month range, I’d rather be an option seller here than a buyer. Traders viewing the current downdraft in BA as a longer-term buying opportunity might consider taking advantage of the higher vol by selling out-of-the-money put options.
By selling a put you obligate yourself to buy 100 shares of the stock at the strike price if the put resides in-the-money at expiration. In the event the stock remains above the strike price, the put will expire worthless, allowing you to keep the entire premium received at trade entry.
Currently you could sell the Feb 72.50 put for $1.21. If BA stays above $72.50 by February expiration you will capture the entire $121. If safety fears continue to plague the stock and it falls beneath $72.50, you will end up buying the stock with a cost basis of $71.29 (72.50 – $1.21), which is near the lower end of Boeing’s 52-week range.
In timing the entry, consider waiting until BA shows some signs of turning higher. In the event it does drop further in price, you will be able to sell the Feb 72.50 put for a better credit.
