We had our eye on BA after it reversed after earnings on July 24th, and the put fly that we traded turned out to be the right structure to play for a 102-108 range ever since. With only 1 day until expiry, and tomorrow basically a coin flip, we’re going to take it off here for a nice gain.
Action: Sold the BA (106.33) Aug9th 109/105 1×2 Put Spread at $2.33 for a $1.30 gain (Remain long the Aug9th 101 Put since it has no bid)
Original Trade July 24, 2013: $BA – Up, Up, and Away?
Boeing reported stronger than expected earnings today, and raised guidance as well, due to higher aircraft deliveries and lower 787 Dreamliner production costs. Free cash flow is quite strong, which has some analysts speculating about future dividend increases and stock buybacks.
But at all-time highs and 20x P/E (its highest valuation in the bull market), how much is in the stock? We’ve discussed BA on 2 separate occasions in the past couple weeks (here and here). Investors have given the company a pass on the many Dreamliner missteps, viewing the problems as growing pains rather than a serious concern. We’re a bit more skeptical, but even if the Dreamliner has no more issues from here, the stock’s ascent in the past 6 months has raised the expectations bar very high.
The stock’s reaction today to a strong number is case in point. Our guess is that many traders waited for after the earnings event to sell the stock, expecting a strong number, like we did. In that context, though the news is good, the sellers might become more aggressive at these prices, particularly given the steep falls BA has experienced on two occasions in the past 6 weeks.
The $108 level is crucial going forward. It was the all-time high in 2007, and the stock is right there this morning:
The nature of the price action in the first 30 minutes today indicates that a false breakout is more likely than a continued move higher, since the stock has failed to make a convincing, strong move above 108 after the strong report.
TRADE: BA ($108.00) Bought Aug9th 109/105/101 Put Fly for $1.03
-Bought 1 Aug9th 109 Put for $2.66
-Sold 2 Aug9th 105 Puts at $0.97
-Bought 1 Aug9th 101 Put for $0.31
Break-Even on Aug9th Expiration:
Profits: Profits up to $2.97 when stock between 102.03 and 107.97 on Aug9th expiry, with max profit of $2.97 with stock at 105
Losses: Up to $1.03 between 101 and 102.03, and between 107.97 and 109, with max loss of 1.03 at 101 or below, or at 109 or above.
Trade Rationale: BA has found support near 100 ever since its June bottom. The 50 day ma comes in around 102. We think the stock is headed lower, but given the strong earnings report, we don’t expect a major move lower in the next 2 weeks. That’s why we chose the fly, targeting the 105 level.