Boeing Stock Has Lifted Off a Little Too High

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Shares of Boeing (NYSE:BA) continue to relatively outperform in an otherwise difficult market. Boeing stock is now up nearly 20% over the past 45 days since making lows near the $320 area in mid-August. Undoubtedly BA stock was punished too severely on China fears, accounting for some of the snapback rally. The latest move higher, though,  has now taken Boeing too far, too fast. It’s time for Boeing stock to begin to descend.

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The U.S. National Transportation Safety Board issued a statement yesterday on the ill-fated 737 MAX  plane manufactured by Boeing. The board concluded that Boeing misjudged how pilots would react in times of stress. Investigators looked at the manoeuvring characteristics augmentation system, which was supposed to make the aircraft easier to fly. Instead, the software and failure of the sensors actually made the plane more difficult to fly.

This news may lead to a longer grounding of the 737 MAX and it highlights safety concerns surrounding the plane — which was Boeing’s best selling aircraft ever.

Technical Analysis of Boeing Stock

Boeing stock is once again approaching overbought levels on a technical basis. The nine-day relative strength index is nearing the 70 area, which has signaled a short-term top in the past. There is significant overhead resistance at the $400 level. And round numbers tend to be even more powerful walls to break through. The moving average convergence/divergence is beginning to turn lower and is close to generating a sell signal on any further weakness. BA is also trading at a big premium to the 20-day moving average, which has preceded pullbacks to that average in the past.

There is clearly momentum after the stock reached recent highs. The reversal pattern from Wednesday is also a sign buying may be diminishing. BA stock traded up to recent highs at $391 before closing well off those highs Sept. 25 at $386.20. This type of reversal pattern is many times emblematic of a short-term top in the stock. Buyers may finally be exhausted after such a strong rally.

In late August, I thought that BA stock was flying a little too high. Boeing stock was near the $370 area at that time. Since then, BA has added on another 5%. Nothing has changed fundamentally — and the valuations have gotten even more extreme. Its trailing price-to-earnings ratio is just under 45. And, its price-to-sales is at by far the highest levels of the past 10 years at 2.4. Boeing stock is also at a big premium to the S&P 500 price-to-sales ratio. It previously traded at a discount.

The short bearish Oct $400/$405 call spread I recommended earlier is still out of the money, even given the rally. It can be sold now for a slightly more advantageous price of $1.30. Implied volatility has fallen sharply since my mid-August article and is now at just the 20th percentile. This means option prices are now comparatively cheap, making option buying strategies more favorable. So to position for a pullback in Boeing stock, a put calendar spread makes probabilistic sense.

How to Trade BA Stock

Buy to open BA Oct 18 $380 puts and sell to open BA Oct 4 $380 puts for a $3.50 net debit.

Maximum risk on the trade is $350 per spread. Ideally, Boeing stock closes near $380 at Oct 4 expiration. If BA is above $380 at that expiration, additional Oct 11 $380 puts could be sold to further hedge the position.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com. 

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/boeing-stock-has-lifted-off-a-little-too-high/.

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