So far, earnings season has been disappointing. Great companies have reported great quarters and their stock has been punished for it for one reason or another. Case in point yesterday, Caterpillar Inc (NYSE:CAT) beat expectations and raised guidance, yet Wall Street flipped it from a +4% rally to a -6% drop on a poor choice of words by their CFO.
This morning Boeing Co (NYSE:BA) reported a monster quarter and so far the stock is holding a decent pop. The outcome of the day remains to be seen but it won’t change my long-term opinion of the stock.
Boeing is a quality company with a proven track record, and most importantly they have a sales backlog that stretches a decade. There are worries from the trade war with China but I believe cooler heads will eventually prevail from our leaders. There is too much on the line for the U.S. and China to act childish and hurt their citizens.
Even then, there are only two choices for large aircraft. So even if China wants to impose tariffs on Boeing, management will just pass down the extra costs to its clients. In other words, they have pricing power to a degree high enough that would absorb the brunt of the tariff punch should it come.
Fundamentally, Boeing stock is not expensive. It trades at 28 trailing 12-month price-to-earnings ratio. While it’s not dirt cheap, given the cash flow it’s definitely not expensive. So owning it at a discount from current levels is not likely to be a major fiscal mistake.
Technically, BA stock had a complete reset in levels this year. The stock broke out from under $300 per share to trade up to $370 per share. Recently and because of tariff War fears, BA has been under pressure testing $310 per share.
So far support has held and therein lies my conviction that even though BA has come so far so fast but it is not bloated and support will hold.
The stock market, in general, is on edge. We have too many fearful headlines circulating for me to risk $330 per share with no room for error. So for this trade, I will use options and bet against BA value and the support that it generates.
The Trade: Sell the BA Sept $250 naked put. This is a bullish trade where I collect $4 to open. Here I have a 85% theoretical chance of success. But if the BA stock price falls below my strike then I accrue losses below $246.
Selling naked puts carries big risk especially for a stock as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the BA Sept $260/$250 bull put spread where I have the same odds of winning. Then the spread would yield 10% on risk.
Since there are no guarantees when investing in stocks, I never risk more than I can afford to lose.
Learn how to generate income from options 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 as @racernic on twitter and stocktwits.
