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Boeing’s Problems Offer Triple Digit Potential In This Company

Boeing’s Problems Offer Triple Digit Potential In This Company

Boeing is in the news for problems with the 737 MAX but those problems extend beyond Boeing. As The Street reported, “Spirit AeroSystems Holdings (NYSE: SPR) – Boeing’s (BA) biggest supplier, plans to lay off more than 20% of the workforce …, as it responds to fallout from the grounding of the 737 MAX jet.

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  • “This is not the news I wanted to share, and I know it’s not the news you wanted to hear,” CEO Tom Gentile said in a letter to employees.

    “But the continued grounding of the MAX fleet and the suspension of production has created a challenging situation for us.”

    The stock dropped as traders considered the news.

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    SPR daily chartThe Street continued, “Gentile said layoffs are “a necessary step given the uncertainty of when production of the MAX will resume and the expected lower production levels when it does resume.

    Spirit has not yet received notice from Boeing on when MAX production will restart or what production rates will be when it does.”

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  • Spirit [plans to] layoff workers later this month at its plants in Tulsa and McAlester, Oklahoma, which also produce components for the MAX. Based on final production rates agreed with Boeing, Spirit said it may have to take additional workforce actions in the future.

    In mid-December 2018 Spirit said it planned to expand operations in Tulsa by hiring about 250 staffers and investing more than $80 million in capital projects to support fuselage manufacturing and assembly.

    Spirit has some 13,000 employees in Wichita, out of 18,000 total worldwide.

    The company said on its website that it builds the fuselage, thrust reversers, engine pylons and wing components on the 737 MAX. The program accounts for more than half its more than $7 billion of annual revenue.

    Spirit on Jan. 1 suspended production of fuselages and other parts for the MAX, after Boeing told the company to suspend shipments.

    The 737 MAX has been grounded since March following two deadly crashes that killed a total of 346 people.

    Separately, Boeing published damning internal messages that showed significant concerns for the safety of its grounded 737 MAX.”

    The stock could move significantly lower with the chart pattern showing a target price below $50.

    SPR weekly chart

    A Trading Strategy to Benefit From Potential Weakness

    The prospects of a further short-term gains in SPR seem to be remote.  But, significant weakness is also unlikely. Traders should consider using an options strategy known as a bear put spread to benefit from the expected trading range in the stock.

    This strategy can be profitable when a trader is looking for a steady or declining stock price during the term of the options. The risks and potential rewards of this strategy are illustrated in the payoff diagram shown below.

    bear put spread

    Source: The Options Industry Council

    A bear put spread consists of buying one put and selling another put at a lower exercise price to offset part of the initial cost of the trade. This trading strategy generally profits if the stock price moves lower. The potential profit is limited, but so is the risk should the stock unexpectedly rally.

    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.

    The Trade Specifics for SPR

    The bearish outlook for SPR, at least for the purposes of this trade, is a short-term opinion. To benefit from this outlook, traders can buy put options.

    A put option gives the trader the right, but not the obligation, to sell shares at a specified price until the option expire. While buying a put is possible, it can also be expensive.  The risk of loss when buying an option is equal to 100% of the amount paid for the option.

    To limit the risks, a second put can be sold. This will generate income that can offset the purchase price, potentially allowing a trader to buy a put with a higher exercise price. That increases the probability of success for the trade.

    Specifically, the February 21 $70 put can be bought for about $3.58 and the February 21 $67.50 put can be sold for about $2.45. This trade will cost about $1.13 to enter, or $113 since each contract covers 100 shares, ignoring the cost of commissions which should be small when using a deep discount broker.

    The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

    In this trade, the maximum loss would be equal to the amount spent to open the trade, or $113. This loss would be experienced if SPR is above $70 when the options expire. In that case, both options would expire worthless.

    The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

    For this trade in SPR, the maximum gain is $1.37 ($70 – $67.50 = $2.50; $2.50 – $1.13 = $1.37). This represents $137 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $113 to open this trade.

    That is a potential gain of about 121% of the amount risked in the trade. This trade delivers the maximum gain if SPR closes below $67.50 on February 21 when the options expire.

    Put 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 $113 for this trade in SPR.

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