Boeing Got Their Wings Clipped
From a recent premium letter to All Star Charts subscribers:
Notice how $BA has been struggling holding on to new highs all year. Until recently, we figured this was just a consolidation at a logical area within an ongoing uptrend. As time has gone on and we’ve received more data, it turns out that the higher probability is a massive failed breakout, which is a common theme around the market these days. As you can see in this chart, not only is this a failed breakout above the former 2018 highs, but potentially a massive whipsaw above these converging trend lines since the Spring.
From failed moves come fast moves. If $BA is indeed about to suffer a failed breakout, then we can expect the downside to be merciless. The All Star Charts team has an intermediate-term price target of $300. The nice thing as options traders, we can position ourselves to profit long before that target is reached, if ever.
We were looking for a close below $343 to get interested in this short, which we got on Monday. Today's rally took us back above this level, but it is our feeling that the stock has now tipped it's hand that the next meaningful move is indeed lower, so we'll gladly take better prices to aggressively sell in to.
Of course, anything is possible in corrective markets where whipsaw is the new norm. So we'll seek to take advantage of the elevated premiums in $BA options while protecting ourselves in the event Boeing is serious about hanging on to its 200 day moving average and regaining back above its 50 day moving average.
For my money, the best play here is a Bear Call Spread.
Here's the Play:
We're going to sell a December 350/360 Bear Call Spread for around $4.75. This means we'll be selling short the 350 calls and purchasing the 360 calls for protection. As of Tuesday's close, the net credit we could expect to receive for this spread is currently around $4.75. If $BA trades lower tomorrow morning, we'll happily work this order lower. In fact, I'd be comfortable selling this spread for as cheap as $3.50 if I have to (hopefully not).
As always when selling premium, we'll look to cover this spread when we can completely close it down for a debit less than or equal to half of the credit we received at initiation. So, if in fact we get $4.75 for the spread tomorrow morning, when we'll look to close it when we can buy it back for $2.35 or cheaper.
The bet here is that $BA is likely to fall. However, the hedge is that if $BA stabilizes around these levels, then the theta decay and likely volatility contraction (which happens when price movement settles down) will work in our favor to help us reach our profit target. The only way we lose is if $BA firms up and tries to make another run at highs. Do you think that is likely in this market environment? Nah, neither do I. But I'm open to being wrong and that's why our risk is defined. The most we can lose is the width of the spread ($10) minus whatever credit we end up receiving.
If we're still in this trade in December once we get under 21 days until expiration, we'll likely close it down (win or lose) and move on. At this point gamma risk starts to become our enemy, making P/L swings (good and bad) more violent. That's not a good recipe for sleeping soundly. I like my sleep.
We've been crushing directional shorts and fading volatility since the middle of October to great effect for our subscribers. The markets changed and we changed with it. What else is there to do? If you'd like to check out a risk-free trial of All Star Options, please head here.