Options Update: Option Players Fly to Boeing

• April 10, 2008
• Mark Fightmaster

Delaying the Dream

Quite a bit of news out there in the airline sector today, as you have AMR announcing more cancellations, Northwest Airlines halting its minimum-stay requirements, and the biggest news from the skies: Boeing is delaying the first delivery of its 787 Dreamliner by 6 months. The first flight is now expected late this year rather than mid-spring. For a full summary of Boeing’s
announcement, follow the provided link, but long story short: a series of setbacks has caused the delay, which BA does not believe will impact 2008 guidance.

This news was well-received on the Street, with the aerospace firm soaring nearly 5.5% higher as of this afternoon. This jump sparked a flurry of option activity, and provided me with what caught my eye today.

Both calls and puts on BA saw heavy activity on our Intraday Volume Explosion List. On the put side, BA’s April 75 put (BA PO) saw the heaviest activity, with volume of 5,562 contracts on open interest of 9,328. On the call side, BA’s May 80 contract (BA EP) garnered the greatest attention with volume of 13,418 contracts and open interest of 53,882.

I looked into the activity and found 1 block of contracts worth noting. At 10:46 AM EST, a block of 6,050 contracts crossed the tape on BA EP with a price of $1.52. This price was between the bid and the ask, but was closer to the bid price of $1.50.

High-Flying Sentiment

Sentiment toward BA in the option pits is bullish, to put it lightly. The firm’s Schaeffer’s put/call open interest ratio (SOIR) of 0.52 indicates that calls outnumber puts 2-to-1 in the front 3 months of options. Furthermore, this reading is lower than all of those taken during the past 12 months. The problem with this extreme level of optimism is that it could unwind in the form of selling pressure.

The same level of enthusiasm is not evident from analysts, but this could be seen as a good sign. According to Zacks, BA receives 8 “strong buys,” 6 “holds,” 1 “sell,” and 2 “strong sells.” This configuration leaves a good deal of room for upgrades, but be wary of downgrades from the lofty “strong buy” perch. Such a downgrade normally carries quite a bit of weight and can ground a soaring stock.

In a Descending Pattern

Compared to the rest of its peers in the Dow Jones Industrial Average (DJIA), BA has struggled. Since July 2007, the airplane builder has lagged behind the broader Dow on a weekly basis. While this trend could end this week, the strong activity could simply be a quick upleg in a larger downtrend. Let’s not be fooled by this quick run higher; BA should be considered a laggard versus the Dow.

Flying Below Resistance

Today’s rally from BA is nice, but it could be considered fruitless if the shares close below the 80 level. This level is important, but the equity’s 20-week moving average may have more impact than the 80 level. Notice that the shares have not closed a week above this trendline since early October 2007. With this trendline descending through the 82 region, we could see it team up with the 80 level to provide quite a bit of resistance.

In her blog entry on BA this morning, Jocelynn noted the importance of the 10-week moving average. I believe the positioning of the 20-week trendline is important as well, especially in light of today’s option activity. If the BA EP contracts were purchased (at $1.52 per contract), the hypothetical purchaser needs the stock to close above $81.52 before May expiration (May 16) in order for the contract to breakeven. With the 20-week moving average at $82.11, the situation is looking tenuous at best.

Furthermore, the longer-term technical picture for BA has a rather foreboding technical formation showing up. The flyguy’s 10-month moving average is on the cusp of a bearish cross with its 20-month counterpart. The completion of such a move could be a precursor to a continued downtrend … bad news for the bulls, but good news for BA bears.

The Verdict? Although there is potential support in place (the 70 level and BA’s 50-month moving average), sentiment is far too bullish for a stock that has hit a bit of turbulence. We could see pessimism unwind should today’s rally lose steam. Remember, the 80 level could be key along with BA’s 20-week trendline. From a contrarian standpoint, BA makes an interesting bearish play in light of today’s news.

If you have any questions or comments, make sure to email me. I will do my best to answer your question or address your concern.

Want more of my thoughts on the market? Don’t like my views and want to see those of my colleagues Andrea, Elizabeth, Jocelynn, or Joe? Make sure to check out our Schaeffer’s Daily Market Blog section throughout the trading day.

Copyright Schaeffer’s Investment Research. https://www.schaeffersresearch.com