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News Sends This Boeing Supplier Higher

News Sends This Boeing Supplier Higher

Boeing’s news affects not just that company but also its suppliers as recent stock market indicated. The Wichita Business Journal recently reported,

“Shares of Spirit AeroSystems Inc. in Wichita and its largest customer, the Boeing Co., jumped [recently] following reports that Boeing plans to quickly ramp production back up on its 737 MAX.

According to a report from Reuters, the company has told suppliers it intends to return to the pre-grounding rate of 52 per month in February 2020 before hitting the previously planned increase target of 57 per month in June.

Supply chain sources in Wichita confirmed to the WBJ that the projected timeline is consistent with what they have been told.

Boeing has been targeting an early fourth-quarter return for the MAX, which has been grounded since March following two deadly crashes of the narrow-body jet.

Shares of Boeing (NYSE: BA) were up [on the news] as were shares of Spirit (NYSE: SPR), which builds around 70 percent of the structure on the 737.

SPR daily chart

A Boeing spokesperson declined to confirm the specific dates, but said the company has updated its master schedule on the program “to reflect timing assumptions for the 737 MAX return to service plan, as our production schedule is contingent upon safe return of the MAX to service.”

Boeing trimmed its own output on the 737 from 52 per month to 42 per month following the grounding, storing completed MAX jets for delivery after the plane returns to service.

Spirit has continued to build at the rate of 52 per month as part of a staggered production agreement with Boeing that has it being paid for excess components, including the aircraft’s full fuselage, and itself holding them in inventory until delivery is requested.

The company will remain at that rate even after Boeing increases until it burns through all its remaining inventory.

Spirit CEO Tom Gentile said following the company’s second-quarter earnings that he expected to stay at 52 per month for all of 2020 as a result.

This news could mark the end of a down trend in SPR and the stock could move back towards recent highs where the chart indicates that resistance is likely to be encountered.

SPR weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying SPR could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for SPR

 Every day, we scan the markets looking for trades with 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.

For SPR, the September 20 options allow a trader to gain exposure to the stock.

A September 20 $77.50 call option can be bought for about $2.08 and the September 20 $80 call could be sold for about $1.10. This trade would cost $0.98 to open, or $98 since each contract covers 100 shares of stock.

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 $98.

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 $1.52 ($80 – $77.50= $2.50; $2.50 – $0.98 = $1.52). This represents $152 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $98 to open this trade.

That is a potential gain of about 155% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.