Smart Traders Scramble for Protection on Boeing
President, Stutland Equities
The following post is a Guest Blog by CNBC Contributor Brian Stutland.
On Monday, an empty Boeing 787 Dreamliner parked at Boston's Logan airport caught fire. Thus began a news barrage of other Dreamliner problems—a Japanese Airlines plane was forced to turn around just before takeoff due to a fuel leak, an All Nippon Airways flight was canceled on account of a glitch in the plane's computer, and a Dreamliner was discovered to have wiring problems. (Read More: Boeing Confident About 787 Despite 'Teething Problems'.)
This comes after Boeing's Dreamliner faced years of production setbacks and delays, and the problems sent Boeing's stock down by 4.5 percent since Friday's close.
Options trading in the stock has had a defensive tone over the past few days, with the biggest trade being the sale of 8,423 February 77.5-strike calls for $0.72, which was done with the stock at $74.62. This call was likely sold against a long stock position, to create what is known as a covered call position. By selling this call, the trader is foregoing any upside in the stock beyond $77.50, but in return collects $0.72 to ease downside risk in the stock position.
(Read More: Options Explained.)
A covered call position on Boeing right now makes a lot of sense for the longer-term investor, because it at once reduces risk and creates yield—while keeping you exposed to some upside in Boeing.
Panic selling now is not a good idea, because in a year or two, this is likely to be just a small blip on Boeing's stock. The Dreamliner is a new and very complex machine, and engineering problems like these are to be expected. Airlines understand this, and the problems are therefore unlikely to hurt future demand. (Read More: Fire Puts Dreamliner Under Scrutiny.)
What would hurt Boeing is having to change their manufacturing process to accommodate major design changes. Boeing currently produces five jets a month, and is hoping to double that by year's end. The jets are typically paid for on delivery, so faster production means higher cash flow for the company.
In the coming days, the bad press on Dreamliners is likely to fade away, and the panic selling in Boeing will abate. Long-term investors will need to keep an eye on how Boeing is reacting to the problems, to make sure that the company is able to quickly resolve issues without slowing production. While the market figures out what is next for Boeing, it makes sense to be short out-of-the-money calls to protect downside and create yield—especially since Boeing is not likely to scream higher between now and February.
I don't have a position in Boeing, so I have not done this trade. But I would suggest it to those who do own the stock.