So far, 2018 has been a year of headlines based on trade wars. Stock fundamentals are held hostage until these headlines abate, as there is tremendous uncertainty hanging in the balance and Wall Street doesn’t want to commit too far in either direction. Boeing (NYSE:BA) reported earnings this morning and the knee-jerk reaction is for traders to sell BA stock down roughly 3%.
Management slightly beat the top- and bottom-lines. But even though they guided higher, the increase was minimal so the headline lacked the pizzazz that investors now need in order to reward BA stock.
Operating margins were also slightly lower than ideal, but this is due to a special $426mn charge for a redesign in the manufacturing of an air force tanker.
Perhaps the biggest reason for the lackluster action in Boeing stock is that management has not addressed the impact from the tariff war on its business. So for now, this threat to BA remains unknown.
Traders always price unknowns by suppressing the stock from its full fundamental potential. And therein lies the opportunity.
BA stock is not typical. It has already run-up significantly, even under the dark cloud of tariff negotiations. This is the byproduct of Boeing having a decade-long sales backlog.
The company has only one competitor, so clients of Boeing are not in control. This also means that tariff fears are overblown. China cannot live without it, so dips in BA stock are entry opportunities.
Technically, a stock that has run as fast as Boeing is hard to chase. The ascending ramp is so steep that it looks like it is about to correct at any time.
So instead of being scared out of trading this quality stock, I use options to participate in the upside. There I can go long BA stock, but leave plenty of room for error.
I am still optimistic on Boeing stock’s market in general. My thesis is that the fundamentals here still warrant higher prices, so without new bad headlines, the bear thesis is thin and the upside scenario for the Dow Jones is more likely than a correction. In that environment, BA should also be higher.
Nevertheless, today’s trade doesn’t even need a rally to profit. As long as the recent proven support levels in BA stock hold, I will retain maximum profits.
How to Trade BA Stock Today
The Bet: Sell the BA Jan 2019 $265 put to open the risk. With this bet, I collect $3.50-per-contract. Here, I have an 85% chance of winning. But if it falls below, then I own shares and suffer losses below $261.50. Compare this with needing to risk $345 at face value to own the shares and then hope for higher prices.
Not everyone is willing to own BA stock, and for those people, I would sell spreads instead to limit the risk potential.
The Alternate Bet: Sell the BA Jan 2019 $280/$275 bull put spread. Here there is about the same chance of success, but to yield 10% on my money at risk.
Investing in the equity markets is always risky, so don’t bet more than you can afford to lose.
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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.
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