Why We're Trading Boeing Co (BA) This Week

by Bernie Schaeffer |

Published on Dec 29, 2016 at 10:23 AM

A steady, low-volatility uptrend in BA shares could pay off for call buyers

A steady, low-volatility uptrend in Boeing Co (BA) shares could pay off for bullish options traders

Perhaps we are too easily fascinated with share price levels and slicing and dicing stock market data, but we couldn't help but notice that the recent venture by Boeing Co (NYSE:BA) shares to an all-time high above $160 placed them well beyond levels that (not so very long ago) would have elicited calls for a stock split. Though always an event that smacked of the "faux bullish," the idea of a 3-for-1 split (whereby the share price would be cut by a third, at the same time as total outstanding shares were tripled) was to cause a company's share price (generally considered "high") to appear more reasonably valued (though theoretically, as no one was really fooled by this "sleight-of-hand").

Or (take your pick), it was said that the post-split share price would allow investors previously "priced out" from purchasing those "expensive" shares to experience those previously forbidden fruits at reduced share prices (plausible only back in the ancient days of insanely high brokerage commissions, plus ridiculous fees exacted for the déclassé act of purchasing "odd lots" of less than 100 shares).

So is BA's share price a testimonial to the defeat of the always-feeble rationale for stock splits finally being exposed to the rational light of day and being justifiably found wanting? Perhaps. But BA is also a component of the Dow Jones Industrial Average. And of the 30 stocks included in the Dow, fully 13 (including BA) currently trade in the triple digits (while just four trade below $40). And the funny thing about the Dow is that it's "price-weighted" -- which means the higher the share price, the greater the company's influence on the Dow. And in these days of indexing and ETFs, it is doubtful many CEOs of blue-chip companies are looking to curb the money that flows from these investment sources by voluntarily reducing their share price (as through the mechanism of a stock split). Which may someday result in a renaming of the Dow Jones Industrial Average to something like the "Dow Mega-Priced Stock Average." And yes, we have strayed a bit here.

But there is a major bullish takeaway for playing call options on companies like BA that "fit the Dow profile" -- namely, these stocks have been attracting major inflows of investor money with regularity due to the indexing/ETF phenomenon, and this process has significantly accelerated in the aftermath of the presidential election and -- more specifically and more recently -- with the advent of "Dow 20,000 fever."

There is not much to parse from BA's fundamentals that's of specific relevance to a call option trade -- as you have your basic $100 billion aerospace & defense behemoth that still manages to churn out low-end double-digit earnings growth. But there is a lot to like in BA's technicals, on display on the accompanying chart.

Most obvious is the fact that the shares recently took out the all-time high at $158.75 that had reigned for 22 months, not long after clearing a 50% gain from the depths of the February 2016 lows. But what appeals to us most of all as call option buyers is it appears that -- after almost three years of sloppy, directionless price action -- the shares are now entering a period of steadily uptrending price movement amidst low volatility. This was previously the case over two periods in wildly bullish 2013 ("A to B," and then "B to C" on the chart -- a period over which BA gained almost 80%). Low volatility uptrends are particularly beneficial to call option buyers, as the gains accrued in the rallying phases are less likely to be negated by brief, but sharp pullbacks that eat up precious time for the option holder.

We'd also note from the chart the sharp spike in volatility that took place near the February 2016 bottom, and the subsequent decline in volatility (to the lower end of the range for BA over this five-year period). And this sharply reduced level of volatility is reflected in sharply reduced BA option premium levels so that, should the low-volatility rally continue as we expect, sharply increased leverage will accrue to BA call option buyers. Our recommended BA call option would achieve its target profit of 200% over the holding period on a 15% rally by BA to the $180 area, and this does not appear to be too much of a stretch over a three-month period.

ba daily sm 1223



Subscribers to Schaeffer's Weekend Player service received this BA commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters -- straight from Bernie's trading desk. Learn more about why Weekend Player is one of our most popular options trading services.
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By MG 2016
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