Tuesday’s stock rally generated mixed signals for Boeing (NYSE:BA) shares. The fallen aerospace juggernaut finished the day up 3.6%, but it was well off its morning highs. Boeing stock is flying in the middle of its recent range, making this is a tough spot to deploy directional trades.
With this in mind, I’ll focus on how you can use options to increase your odds of success.
Let’s start with some interesting observations on the persistent correlation between companies in the airline industry. You’ll recall that in bear markets, correlations run to one. Said another way, the market becomes monolithic, with everything rising and falling as one. Stock picking loses its efficacy.
Boeing and JETS Are Linked at the Hip
When a bull market returns, however, correlations weaken, and individual stocks start behaving more independently. To anyone watching over the past few months, it’s evident that buyers have returned, and the S&P 500 is best defined is in a bull market. What else would you call a 44% rip off the lows over three months?
But here’s what I find intriguing.
Airlines are still moving as one. And that includes Boeing stock. Its price chart mirrors that of Delta (NYSE:DAL), American Airlines (NASDAQ:AAL), Southwest Airlines (NYSE:LUV) and just about every other airline-related company I can think of. For simplicity, we could use the super popular Global Jets ETF (NYSEARCA:JETS), which is shown below.
On days where JETS is jumping, Boeing is too. The same goes when the fund is sinking. To measure the relationship between the two, here’s a daily chart of Boeing stock with a 10-day correlation to the JETS ETF displayed in the lower panel. The reading is 0.94, which is virtually as high as it gets. This wasn’t always the case.
Once upon a time, Boeing traded based on its fundamentals. Its fate wasn’t tied directly to that of the airline industry. But the novel coronavirus’ arrival changed everything. As soon as March hit, the correlation reading ramped to 1.00, and it has barely budged since.
Until this changes, I see little reason in spending a lot of time scouring Boeing’s news or fundamental data. The market is viewing it as a proxy play on the entire airline industry. As goes one, so goes the other.
Boeing Stock Charts
Despite Boeing’s inability to hold onto the entirety of Tuesday’s gains, the fact is, it did still close in the green. And with that, it has notched a third up day in a row to build on Friday’s rebound attempt. Buyers have to be happy that Boeing stock held its breakout area during last week’s retest. The support zone that I’m watching is $165. As long as we remain above that, bulls deserve the benefit of the doubt. The rising 20-day and 50-day moving averages are also helping the bullish case.
The next resistance zone is $230, so that’s the upside target. With today’s close near $200, we’re effectively right in the middle of both zones. That makes this a tricky entry for directional plays because the risk/reward isn’t all that favorable. But if you’re dead set on placing a bet, implied volatility is high enough to make short options strategies interesting. And you can tilt the trade bullish or bearish depending on which way you think Boeing resolves itself in the coming month.
Bulls: Sell the July $150/$145 bull put spread for around 80 cents.
Bears: Sell the July $260/$265 bear call spread for around 70 cents.
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