Shares of Boeing Co (NYSE:BA) have fallen sharply over the past three days as fears of higher costs due to steel and aluminum tariffs drove Boeing stock lower.
As the best-performing stock in the Dow Jones Industrial Average in 2017 (up nearly 90%), BA stock was climbing ever higher … perhaps a little too much. Now that shares have pulled back sharply from that high altitude, BA is looking a lot more attractive at these current lower levels. Look for a period of consolidation in Boeing stock over the coming month.
The Trump tariff tirade that drove BA stock lower is likely overdone.
A look at the recent weak price action in steel and aluminum stocks certainly hints that the tariffs may lack the big bite that markets originally expected. Canada, Mexico and Australia have already been exempted. Like all things Trump, the original bluster falls far short of the ultimate reality.
I expect Boeing shares to recover from the tariff trashing.
Important to remember that Boeing absolutely crushed earnings expectations in the most recent earnings report. EPS came in at $4.80 per share, a huge 65% upside surprise to the $2.91 consensus.
This brings the 2018 forward P/E ratio down to a much more reasonable 24.50. Add in the nearly seven-year backlog of orders (5,684 planes) and BA stock is definitely worth considering on any further weakness.
Boeing briefly went into bear market territory Wednesday, with shares falling over 10% from the all-time closing high of $364.64 from Feb. 27. BA stock did recover, however, to close well off the lows.
Click to Enlarge What’s more, Boeing pierced the 50-day moving average before reversing to finish the day right at that level. MACD is at an extreme reading which was indicative of lows in the past. Most importantly, Boeing bounced off the critical $320 support level and headed higher. I expect this level to hold over the next few weeks.
In my previous article on BA stock, I was decidedly more bearish on Boeing with shares trading at higher levels. This proved to be the case, with Boeing dropping.
The subsequent combination of a lower stock price and much better than expected earnings definitely changed that bearish view however-because price and valuations do matter.
BA options are currently priced in the 60th percentile of implied volatility (IV). This means option prices are somewhat expensive, favoring selling strategies when structuring trades. So to position for BA stock to begin to climb from current levels, a bullish put spread makes sense.
Boeing Stock Trade
Buy the Boeing stock April $305 puts and sell the April $310 puts for a $1.00 net credit.
Maximum gain on the trade is $100 per spread with a maximum risk of $400 per spread. Return on risk is 25%. The short $310 strike price provides 6% downside cushion to Boeing’s $330.26 closing price and is also struck well below the major support level at $320.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.
