Boeing Co (NYSE:BA) was the best performing stock in the Dow Jones Industrial Average for 2017, rising an unbelievable 89%. BA continued the ascent in the first few weeks of 2018 by climbing yet another 19% in the first 11 trading days of 2018. Like all high-fliers, though, at some point the rally becomes overextended.
I look for Boeing stock to encounter some turbulence trying to head higher from current levels.
Valuations are beginning to look a little stretched for BA after more than doubling in price in the past 13 months. The current P/E of 31.2 far exceeds the industry average of 25.7 and is more than 50% higher than the five-year average for Boeing of 20.5.
It is also by far the highest multiple in the past 5 years. The forward P/E ratio of 29.4 is also rich and is also at nearly a 50% premium to the S&P 500. So certainly BA is not cheap by any stretch.
BA is also trading at an extreme from a technical standpoint. 14 day RSI recently breached the 90 level for only the third time in the past year. The previous two instances marked significant short-term tops in Boeing stock.
The price action for last Thursday, with shares attempting to make new all-time highs only to fail and close lower on the day, points to a reversal day for BA. I expect the rally to stall in Boeing, especially given that earnings are on the horizon.
Earnings are due January 31 for BA with expectations of $2.91 in EPS and $24.94 billion in revenue. The whisper number, which is what analysts really expect, calls for $2.98 in earnings. So certainly a slight beat is already factored into the current stock price of Boeing.
BA options are comparatively expensive, trading in the 89th percentile. So to position for a week of consolidation pre-earnings, a short-term bearish call spread makes sense.
Buy BA Jan 26 $352.50 calls and sell BA Jan 26 $350 calls for a 40 cents net credit
Maximum gain on the trade is $40 per spread with a maximum risk of $210 per spread. Return on risk is 19.04%. The short $350 strike price provides a 3.6% upside cushion to the $337.73 closing price of Boeing stock.
The Jan. 26 expiration means the options will expire before the earnings date of Jan. 31, greatly lessening the risk.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at firstname.lastname@example.org.
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