The problems over at Boeing (BA) are well documented. Everyone knows about the 2 crashes of the company’s 373 Max aircraft. These are tragedies to be sure and we believe that Boeing will fix the problems and get back on track.
In the meantime, the 737 Max has been grounded and the company is suffering from order cancellations. This is sure to result in lawsuits from Boeing’s customers who are suffering losses due to aircraft grounding. How much this will cost the company is unknown, but it is sure to rise as each day passes. Furthermore, the lawsuits are starting from the families whose lost loved ones in the two crashes.
With this negative backdrop, back on March 3, we thought BA stock was at risk of a decent size decline but not a collapse. BA was trading at $368.18 at the time. However, the sentiment was quite negative, so we thought there was some risk the share price would bounce if there was an announcement from Boeing that they would be able to announce a solution to the electron systems that rand the plane.
In circumstances like these, a ratio put spread is a good way to play the stock. In this case, we bought 1, $335 strikes put and sold 2, $320 strike puts with May expiration for a $2.15 credit. The best outcome occurs if the price falls to the lower strike at expiration.
Well, it seems that BA shareholders and traders believe the company will have a viable solution. The share price has risen $13.62 ($382.80 – $369.18) since we suggested the trade. The spread we bought for $2.15 credit can now be sold for about $0.11. For those who participated at the indicated prices would make $226 per structure.
At this point in time, there is little to be gained to hold on to the trade. If the price continues to rally or stay the same, the $0.11 premium will disappear. If the share price falls modestly, the position will love money. The share price would have to fall below $335 for the trade to make money from here. So now is a good time to close the trade, take a modest profit an move on.
If you want to know more about the finer points of the bigger story around BA and the development and FAA approval of the 373 Max aircraft, Vox.Com wrote a pretty comprehensive article on the subject. We suggest everyone have a read. To do so, click here.
Given the situation, we may suggest re-initiating this trade with higher strikes and more time time to expiration. We want to do a little more risk analysis before doing so as there may be a little more risk in repeating this trade with the stock trading at higher prices.
