After making new all-time highs at $371.60 on June 6, shares of Boeing Co (NYSE:BA) have come back to earth, dropping nearly 9% in just the past few weeks. Much of the angst can be attributed to the China tariff turmoil and general overall weakness in airline stocks. While some of the fears are justified, the bearish price reaction in BA stock is now getting decidedly overdone. I look for the carnage to come to an end soon for Boeing shares.
In my previous analysis of Boeing from March 15, I highlighted some of the reasons why the selling was likely overdone. Now that BA stock is back at virtually the same levels, all of those reasons still apply. Plus, factor in a major earnings beat on April 25 and the bull case for Boeing becomes even more compelling than it was in mid March. A dividend yield now exceeding 2% and a low payout ratio of just 46% also adds to the attractiveness for value investors.
BA stock is now the most oversold it has been over the past year on a 9-day RSI basis. The only previous time Boeing had a reading below 30 proved to mark a significant low in the shares.
The 200-day moving average at $311.26 should also add some additional major downside support. Friday also saw BA stock trading lower on the day only to ultimately rally and close higher. This type pf reversal pattern is many time indicative that the sellers may have become fatigued, especially after such a sharp sell off.
Implied volatility (IV) in BA options is fast approaching the highest recent post earnings levels, meaning option prices are comparatively expensive. So to position for support to hold in BA stock, a short-term bull put spread makes probabilistic sense.
BA Stock Trade Idea
Buy BA July $310 puts and sell BA July $315 puts for a 90 cents net credit.
Maximum gain on the trade is $90 per spread with maximum risk of $410 per spread. Return on risk is 21.95%. The short $315 strike price is structured below the $320 support area and provides a 5.57% downside cushion to the $338.91 closing price of BA stock.
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
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