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Boeing’s Challenges Create A High-Income Opportunity

Boeing’s Challenges Create A High-Income Opportunity

The Boeing Company (NYSE: BA) has faced a number of challenges this year and as CNBC recently reported, challenges remain daunting,

“With just 35 days left in 2019, the FAA is making it increasingly clear it is unlikely to recertify the Boeing 737 Max this year, a target Boeing has been eyeing for months.

For the third time in two weeks, the FAA said publicly it will take all the time it needs to deem the Max safe.

The FAA issued a new statement, saying, “The FAA has not completed its review of the 737 Max aircraft design changes and associated pilot training. The agency will not approve the aircraft for return to service until it has completed numerous rounds of rigorous testing.”

BA daily chart

CNBC has asked Boeing if it sticks by its guidance of the 737 Max potentially returning to commercial service by the end of January. The company says it has not changed its outlook.

This is the latest move by the FAA to publicly push back on Boeing’s belief that Max deliveries could resume soon. In its most recent 737 Max progress report issued on Nov. 11, Boeing said it is “possible that the resumption of Max deliveries to airline customers could begin in December, after certification, when the FAA issues an Airworthiness Directive rescinding the grounding order.”

Boeing’s suggestion the Max is close to returning did not sit well with the FAA and Administrator Steve Dickson. Four days after Boeing’s statement, Dickson released an internal letter he sent to the FAA’s associate administrator who oversees the Max certification process. “The FAA fully controls the approval process,” Dickson wrote.

The message could not be missed: The FAA will not rush the certification of the Max simply because Boeing believes the process should be completed by a certain date. To drive that point home, Dickson posted a video message to FAA employees the following day saying, “I’ll support the time that you need to conduct a thorough, deliberate process for a safe return to service.”

For the 737 Max to be recertified to fly this year it will have to clear several hurdles in a short time. For starters, the FAA must conduct Human Factors Testing to evaluate the revamped MCAS flight control software.

That testing, which takes up to three to four days is expected to start next week, according to one person familiar with the Max timeline. By mid-December, the Max may finally make its certification flight. When it’s over, it could take a week or two to analyze the data and complete a final report on that flight.

In addition, the Joint Operational Evaluation Board simulator trials with line pilots evaluating the updated training for the Max still needs to take place.

Finally, the FAA’s Flight Standardization Board needs to file its report on MCAS, which then will start a public comment period of one to two weeks.

Only after all of those steps are completed will the FAA lift the grounding of the Max with an Airworthiness Certificate. In its latest statement, the FAA said, “Issuance of the Airworthiness Certificate is the final FAA action affirming that each newly manufactured 737 Max is airworthy.”

Boeing is now near resistance and could face more challenges.

BA weekly chart

A Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

A Bear Call Spread in BA

For BA, we could sell a December 20 $365 call for about $9.40 and buy a December 20 $367.50 call for about $7.48. This trade generates a credit of $1.92, which is the difference in the amount of premium for the call that is sold and the call.

Remember that each contract covers 100 shares, opening this position results in immediate income of $192 The credit received when the trade is opened, $192 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $58. The risk can be found by subtracting the difference in the strike prices ($250 or $2.50 times 100 since each contract covers 100 shares) and then subtracting the premium received ($192).

This trade offers a potential return of about 231% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if BA is below $365 when the options expire, a likely event given the stock’s trend.

Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $58 for this trade in BA.