It’s the kind of macabre analysis that always occurs after a tragedy.
In Ethiopia, in a dark dirt field just outside Addis Ababa, the belongings of those who died on Ethiopian Airlines Flight 302 have been pushed into a pile. There is much sorrow in the pictures that have been published by media organizations, yet some investors aren’t focused on the tragedy of the doomed flight but on the stock price of Boeing (ticker: BA), which made the 737 MAX 8 jet that crashed.
Since news of the accident, Boeing’s stock has fallen sharply as investors have aggressively sold what had been one of the best-performing stocks in the entire stock market. Every market pundit seems to have some statistic that shows how important Boeing’s performance has been to the extraordinary rally in the Dow Jones Industrial Average, and thus the stability of this now-historic bull market. Still, many investors are wondering how to proceed now that such a strong-performing stock has weakened.
Boeing’s stock is now priced at far more attractive levels than it was just a week ago, though of course the risk profile of the stock is markedly different after the crash. After China, Indonesia, Australia, Singapore, the United Kingdom, and Canada banned the jet, President Donald Trump announced on Wednesday that the Federal Aviation Administration would ground Boeing’s 737 MAX planes in the U.S.
“The safety of the American people and all people is our paramount concern,” Trump said.
The president’s concerns frame the challenges faced by investors in trying to decide what to do with Boeing stock at a time when computer problems might be to blame for the recent 737 MAX crash—and perhaps the October 2018 Lion Air crash in Indonesia too.
There is much that remains unknown about the downed jet, and thus the risks that face Boeing. And there is much fear in the investor community, and that always triggers an unsentimental focus on trading that is sure to offend most everyone.
To be sure, it is impossible to know what happens next. Boeing stock is weak and it is difficult to anticipate what happens tomorrow, or even in six months, while the crashes are under investigation. During the past 52 weeks, the stock has ranged from $294.16 to $440.62.
Since the stock is likely to remain under pressure, investors who own the stock should focus on hedging if they are not interested in selling. But the implied volatility of Boeing’s options are elevated, reflecting the difficulty of knowing the stock’s future and the risk of owning the stock. The first reaction to the crash in the options market was chaos. Some investors bought puts and others bought calls, and some probably did both trying to profit from a decline and a snapback rally.
Extremely aggressive investors may consider selling downside puts and buying upside calls to monetize fear, while also positioning for a recovery in the shares. If it turns out, for example, that there are major problems with the MAX 8 jet, Boeing is likely to encounter even more turbulence.
With Boeing stock around $377, investors could create a “put spread” by buying the June $350 and selling the June $300 put. The spread cost about $10. The strategy protects investors in case the stock breaks below the 200-day moving average of $355.
The drawback to the trade is that it only hedges a decline to $300. Below that price, this hedge ceases to provide protection, so it is important to understand that the spread, unlike a straight put purchase, has a limit. Investors could, of course, just buy a put, but Boeing’s puts are extraordinarily expensive. Anyone who is that afraid of the stock’s trajectory is likely best served to exit from the position.
After all, the situation remains fluid, and arguably unknowable. Should it emerge that real problems exist with the MAX 8 jet, investors are likely to aggressively dump the stock.
Steven M. Sears is the chief investment officer of StratiFi Technologies.