Shares of Boeing (NYSE: BA) have been on a nice flight higher after bottoming out near the $340 area just a few weeks ago. BA stock has now added on over 25 points, or roughly 7.5%, since the lows on September 10. While certainly some of the rally is attributable to an easing of the Chinese tariff fears, the latest move has come a little too far, too fast. Look for BA to run into some turbulence if it tries to fly higher.
Boeing is getting expensive on a fundamental basis. The current P/E of 23 is well above the company’s 5 year average of 20.5 and also at a premium to the S&P 500. The dividend yield of just 1.8% is also well below the recent norm and also at a discount to the overall market. Other metrics, such as the widely followed price/cash flow, show similar extremes.
Price to sales for BA stock, which can’t be boosted by accounting gimmicks and stock buybacks, stand at 2.3- over double the 5 year average of 1.1. It is also at the highest level over the past 10 years and is no longer trading at a discount to the S&P 500. At some point valuations do matter.
BA stock is definitely overbought on a technical basis. $372 is a major resistance level that has proved formidable on three prior attempts at failed break outs. 9 day RSI reached an overbought reading before pulling back. Previous times when Boeing was this overbought proved to mark significant short term tops. BA stock is also trading at a large premium to the 50 day moving average of $352.47, another sign of overexuberance. A move back towards the average is likely on the horizon.
BA options are currently trading at the 38th percentile of implied volatility (IV), meaning option prices are somewhat cheap. This favors long volatility strategies when constructing trades. So to position for a pullback in BA stock, a put diagonal spread makes sense.
BA Stock Trade Idea
Buy BA Nov $365 puts and sell BA Oct $360 puts for a $8.10 net debit
Maximum risk on the trade is $820 per spread. Ideally BA stock closes near the $360 level at October expiration to realize the maximum potential gain.
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.
