Navigating the Turbulence: Strategies for Investing in Boeing and Other Airline Stocks
In uncertain economic times, particularly when the future appears cloudy with potential downside risk, it can be challenging to decide on where to allocate your investments. However, when you believe that certain sectors, like the airline industry, are undervalued, there are strategic ways to invest without taking on an excessive risk. One such approach involves using options trading to create a balanced position. Let's explore how to do this with Boeing (BA) as a case study.
Creating a Bullish Call Spread with Boeing
One intriguing strategy is to go long on Boeing by buying a bullish call spread and funding it by selling a “naked put”. For example, consider that Boeing's stock (BA) is currently trading at around 123. You can buy the May 125/150 call vertical for approximately 10, while simultaneously selling the May 100 short put for 11. This setup results in a net credit of 1, often referred to as a 1 credit.
Scenario Analysis
Let's break down the potential outcomes of this strategy based on various scenarios:
If BA drops below 100: You will be assigned to buy BA shares and end up with a net cost of 99 per share (10 - 11 -1, so you pay 99). Between 100 and 125: You will make a 1 dollar profit (11 - 10 1). Above 125: Your profit will increase by 1 dollar for every dollar that BA rises up to a cap of a 150 share price. If BA is at or above 150 at expiration, your gain could be as high as 26 (150 - 125) 1 26.When to Buy, When to Sell, and When to Stay Away
Deciding whether to buy, short, or stay out depends largely on your assessment of the market. The key is to determine if the current market price reflects the true value of the stock in consideration of all relevant factors, including known risks. If you conclude that the market is undervaluing the risks, it may be wise to buy. Conversely, if the risks outweigh the perceived value, shorting or avoiding the stock altogether might be more prudent.
Current Position and Thoughts on Buying More
Right now, the author is holding both a long and a short position, illustrating a balanced approach. For instance, they are long on one airline and short on another. If you believe the airlines are on the path to recovery, they can indeed be bought at no cheaper price than the current one if you are convinced of future growth. This is why the author chose to buy more shares when the price was lower, hoping to buy more if it dropped further. Shorting the other airline was a way to offset the red numbers on their account page, aligning their portfolio in the short term.
In conclusion, navigating the uncertainty in the airline industry requires careful consideration and strategic positioning. By understanding options trading and assessing market risks accurately, investors can take advantage of undervalued opportunities while managing risk effectively.