What can happen in nine months and 15 days? Roughly the average length of human gestation for one. Oh, I have another. On the first of March, 2019, shares of Boeing (BA) were hotter than heck. The shares hit a high of $446.01 that day. I had dabbled in the name, in and out for a few trades here and there, but largely I kicked myself as a trader who tends to be involved in the defense and aerospace type names, that I had focused more on Lockheed Martin (LMT) , Raytheon (RTN) , and Northrop Grumman (NOC) for most of the time that Boeing was on the rise. I really missed much more of that rally than I caught.
Nine months and 15 days later, the shares look to be on their way to testing significant support, a rough 25% off of their highs for the year. What now? A question far too complex to easily answer. A question reliant upon corporate fundamentals no longer considered reliable, as well as technical analysis based upon charts constructed under vastly different conditions. A quandary for those long the name. Pure speculation for those on the sidelines.
Since the grounding of Boeing's 737-Max aircraft back on that day in March in the wake of two deadly accidents, CEO Dennis Muilenberg has been stripped of his responsibilities as Chair, and Kevin McAllister has been removed from his position as Head of Commercial Airplanes, historically the firm's most important business unit. The firm has also had to take a $3.6 billion charge to cover production costs, while also setting aside more than $6 billion to compensate customers (airlines) impacted by forced schedule changes as they could not fly aircraft that were already in their rotation, nor stay on schedule to purchase more.
The news cycle started to pick up again last week. Federal Aviation Administration chief Steve Dickson expressed concern that Boeing's stated schedule to get these aircraft back in the air was "not realistic." The firm had cut production of the 737-Max down to 42 per month this past April, and had expected to start boosting production this March, and then again this September.
Last Thursday, American Airlines (AAL) made plain that they were going to have to clear the 737-Max from their itineraries through April 7th, meaning that it would now be more than a year that American Airlines had been unable to fly that aircraft.
Over the weekend, the Wall Street Journal reported that Boeing's board was in meetings to discuss potentially a pause in production for the 737-Max. This morning (Monday), shares of Boeing have been volatile as the talk is now on reports that Boeing will either go through with that suspension of production, or cut back further from current levels.
Keep in mind that not only does a move or moves like this impact airlines across the globe, but also as many as 600 firms involved somewhere in the supply chain. We're talking GDP here. In addition to the obvious external impact, internally the firm will now have to consider the implications for their own labor force, for the possibility of putting more cash aside to cover charges, as well as clients, and that's not even getting started on projections for earnings and revenue going forward.
At this point, I see five star analyst Cai von Rumohr of Cowen maintaining his Buy rating and $419 price target on the shares. That's a high profile shot in the arm, but to be fair, Rumohr has never wavered in his bullish opinion of Boeing. The street woke up with an average price target of roughly $388 on shares of BA, but at least for my own account, as I have been in the past, I will be slow to get on this train. There will be more professional opinion expressed once there is more news. Speaking just for me, there is less risk if one has the conviction of opinion in expressing their own view through several options strategies than there is in staking a claim in the equity space.
For starters, I think it noteworthy that in response to the March through August selloff, these shares found resistance at nearly a precise 61.8% retracement of the move. This formation resulted in what really looks like a nine month base.
It becomes difficult to imagine these shares not at least testing the August low of $319. Should the shares find that spot and fail that test, can prices lateral to the lows of December 2018 then be avoided? I really do not know the answer to that question. I just know that I would not be surprised.
Volatility Trade Idea (minimal lots)
I will make this clear, I am thinking of doing something like this. Do not make the mistake of thinking that I am in the foxhole with you. When it comes to Boeing, I am not.
- Purchase one BA December 20th $332.50 call for roughly $4.75.
- Purchase one BA December 20th $230 put for roughly $4.20.
Net debit: $8.95
Notes: First off, these prices will be different, and different strike prices will likely be appropriate by the time you read this. The outlay of $895 may be a little expensive for the individual investor, so that's a call one has to make for themselves. To be profitable, the underlying shares need to be trading either above $241.45, or below $221.05 by expiration this Friday. Worst case? The shares end up in between $230 and $232.50 at expiration. In that case the trader will lose the entire $895 investment.