Boeing Shares Have Been On Fire Too

  • How the stock (or ETF or ETN) does over the average 6-month period over the long term. 
  • How it did over the most recent six months. 
  • What option market participants are betting it will do over the next six months. 

When Boeing scored highly on our gauges of options market sentiment in September, at first we wondered why. Then we came up with a couple of theories:

  1. Lack of competition. Airlines looking to buy jumbo jets are faced with a duopoly: Boeing and Airbus. The occasional 737 MAX falling out of the sky is fatal for its passengers and crew, but not for Boeing.
  2. Hope for a return to normal after the election. Some observers have speculated that the continued COVID-19 lockdowns have been driven in part by politics: to make voters miserable so they turn against the incumbent. If that's true, then there will be less reason to maintain the lockdowns after the election. And a decline in lockdowns may release pent-up demand for travel which could spur airlines to order more planes.

If you listened to President Biden's speech Thursday night, it didn't sound like he was describing a return to normal anytime soon. Nevertheless, our theory for a pent-up demand for travel spurring airlines to order more planes has come to pass. 

In Case We're Wrong About Boeing This Time

In case we're wrong about Boeing over the next six months, like all of our top names, it can be cost-effectively hedged. For example, this was the optimal put hedge to protect against a greater-than-20% drop in Boeing between now and late August (the closest options expiration to six months out).

Screen capture via the PA iPhone app

The cost of that hedge was 6.69% of position value (calculated conservatively, using the ask price of the puts; in practice, you can often buy and sell options within the bid-ask spread). We consider that a cost-effective hedge for two reasons. First, Boeing has a reasonable shot of gaining another 20% or 30% over that time frame. If that happens, you'd still have a healthy double-digit return, net of hedging cost. And second, if Boeing shares plummet instead, your maximum loss of 20% includes that hedging cost; i.e., you'll only be down a maximum of 13.31% not including the hedging cost. 

View single page >> |
How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.