Boeing Co (NYSE:BA) has been one of the best-performing stocks in the Dow Jones Industrial Average so far this year, rising nearly 8.5%. On an intermediate term basis, the rally has been even more impressive, with BA stock rising some 20% over the past two months.
The reaction post-earnings, however, was rather tepid. This may signal that the rally in Boeing stock may encounter some turbulence and consolidate over the coming month.
In the latest earnings report on Jan. 25
, Boeing beat both earnings ($2.47 actual versus $2.34 expected) and revenues ($23.3 billion versus $23.1 billion expected). Boeing stock initially jumped on the earnings news, trading to an all-time high of $170 before pulling back sharply.
Click to Enlarge This type of price reaction post-earnings is usually emblematic of a short-term top in the stock, especially following such a sharp rally.
Given the recent rally, BA stock is no longer trading at a cheap multiple. With a price-to-earnings ratio now over 22 on a current basis and over 16 on a forward basis, I expect Boeing stock to have difficulty rallying significantly from current levels given the comparatively rich valuation.
Click to Enlarge In a note from Monday, Buckingham Research downgraded BA from “neutral’ to “underperform” with a $140 price target. Goldman Sachs had previously issued a “sell” rating on BA stock with a $124 price objective. Certainly the analysts are decidedly mixed on Boeing going forward, with a consensus price target of $173.70. This lack of consensus should provide fuel to consolidation thesis going forward.
A big benefit of using options versus stock is the ability to position and profit from sideways action. So to position for a period of consolidation, an out-of-the money bear call spread makes intuitive sense to me, especially given the recent price action and extended valuations.
BA Stock Trade Idea
Sell BA March $175 calls and buy BA March $180 calls for a 60-cent net credit or better.
Maximum gain is $60 per spread with maximum risk of $440 per spread. Return on risk is 13.6%. The short $175 strike price is positioned $3.85 above the Tuesday closing price of $168.50 and also above the resistance level at $170.
I would look to close out the trade on a meaningful break above the $170 level while hoping to have the spread expire worthless and keep the initial credit if BA remains well-behaved.
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 tbiggam@deltaderivatives.com.
