Put Selling is among the best of strategies when an investor thinks they want into a stock but are unsure about the price point being considered for entry. Boeing Stock is a very good example. With the 787 Dreamliners being grounded world-wide for electrical problems the stock has become more volatile. A question from an investor who asks about “getting in cheap” through Put Selling on a stock brings up the question of fair value. Boeing Stock trades on New York under the symbol BA. Just to advise in advance that I have never done Put Selling against Boeing Stock and I have never been interested in owning shares, but the Put Selling strategy I would suggest is something I use constantly on many stocks. Please note that part of this article is for FullyInformed Members only.
Put Selling Boeing Stock Turmoil
Question from Investor
I have always been interested in Boeing Stock but have been too timid to buy it. Your Put Selling seems like a great way for me to scale into the stock while all this turmoil depresses it before it soars away from me. I did very well in 2012 making a 28% return on your suggestions and following your trades. I look upon you as my Captain and I am a paying member. So Captain, I have two questions. Where do you think fair value is in Boeing stock because you are always talking about fair value and what put strike would you pick for Put Selling for me to eventually own 1000 shares and why? Finally would you have a simple Put Selling strategy that doesn’t take too much of my time. I just started a new job and I’m busy but I want to keep investing and growing my money. (I guess that makes 3 questions?) I know you mentioned in an article somewhere that you don’t like airline stocks and I can’t remember why not, but I appreciate your suggestion. I tipped your tipjar because I think $18.95 to be a member is not enough for the work you do. I know I trade at my own risk. Don’t worry, if I crash and burn I won’t hold you responsible. I’ll just consider it “human error”. Adam G.
Flying Without A Parachute
I loved the email. The tongue-in-cheek approach is definitely appreciated! The reason I do not like airline or aerospace stocks is I have always felt like I was flying without a parachute. (my attempt at tongue-in-cheek). Technical analysis of a stock is one thing, but technical analysis of airline stocks is always difficult because fundamentals can change quickly with airline stocks which makes technical analysis very inconclusive.
I consider Boeing Stock to be an airline stock. There are so many fundamentals that affect Boeing that it’s very tough to pick where fair value is and what put strikes to consider selling. That said, I am glad Adam mentioned that he wants the stock. Adam did not mention whether this was eventually going to be a long-term holding or just for a year or two but here’s my answer along with a simple Put Selling strategy I call the Couch Potato Put Selling.
Put Selling Against Fair Value
For Put Selling against fair value let’s bring up the 10 year chart on Boeing Stock.The 10 year weekly chart below shows some of the highlights of Boeing stock. From a high in July of 2007 of $107.83 when Boeing stock was in my opinion overvalued to the low in March 2009 at $29.05 when it was undervalued you can see the past 10 years have certainly been interesting and I can see why Adam would be interested in Put Selling the stock. Put Selling premiums are quite good with Boeing Stock.
For Put Selling Boeing Stock the rise from the ashes of the bear market in 2003 to the top in 2007 would have made for a wonderful Put Selling trade which would have lasted four and a half years! Once the double top was put in by July 2007, that signaled the end of the Put Selling opportunity for a while in Boeing Stock.
By the time the March 2009 low was in, Put Selling again would have been profitable and practical, but unlike the 2003 bear market recovery, the 2008-09 bear market recovery had not been in a straight line. Indeed the stock has had its share of trouble and including technically not able to move beyond the highs of 2011 which is somewhat bearish for Boeing Stock, at least in the short-term.
Put Selling Boeing Stock – 5 Year chart
The five-year chart provides some answers to our goal of finding fair value for Put Selling against Boeing Stock based on present, future and past earnings to pinpoint fir value in the stock.
The chart below shows fair value at $60 for Boeing stock. Not only has $60.00 been tested multiple times from 2008 to 2011, but since 2011 the stock has held above that support zone. Getting into the stock at $60 makes a lot of sense whether for a medium term trade or longer term time frame. I would not want this stock much higher than $60.00.
Boeing Company Fundamentals
Book value on Boeing Stock is just $4.72 per share. Earnings were up 12.28% in 2012 over the previous year with an earnings per share of $5.67. Cash flow is $7.96 a share which is quite good. Profit margins are slim in the aerospace industry at 5.46% for Boeing which is lower than the industry average at 6.2%. The PE at 13.2 times is below the industry average of 15 times so that is in Boeing’s favor. Dividend yield is 2.59% as of Friday Jan 18 2013 close of $75.04.
Problems At Boeing Company
The problems with the 787 Dreamliner will definitely impact Boeing Company going forward. Aside from any possible law suits, there will be delay fees, retooling costs, recall notices, storage fees and more. The delays in deliveries and the grounding of the airlines will impact the bottom line. All of this will be a major headache and revenue drain for Boeing stock so I believe the latest little bounce is probably technical in nature as investors love to jump into what they think is a great buy when a company has problems.
But the problems at Boeing Company cannot even be estimated as to cost yet, so jumping in without a “parachute” could be a mistake. I can understand Adam’s interest in Put Selling against Boeing as it is definitely the only way I would touch this stock.
Put Selling Strikes To Consider
I don’t see any reason someone would want to own Boeing stock long-term as a core holding. The aerospace industry is constantly in turmoil. The only time to buy this type of stock for a core holding is when the stock markets have crashed. For example if an investor had bought 500 shares in the crash of 2001 he would have paid perhaps $32.00. In 2003 he would have paid around $27 and in 2009 around $30. He would then own 1500 shares for a total cost of $44,500 or $29.66 a share. The dividend is $1.68 for a yield of 5.6%. Even at 5.6% I consider that too low to make holding the stock worthwhile. Instead in each of the crashes I would have bought 500 shares and sold it when stocks recovered.
Nonetheless Adam wants shares at fair value and as he is busy he need a simple but effective Put Selling strategy.
To get there consider Put Selling to end up in fair value range if assigned shares but realize that if the turmoil at Boeing gets worse the stock could fall further than you think. My objective would be to end up somewhere around $60.00 in the stock. For Adam’s needs I would suggest Couch Potato Put Selling Strategy.
Couch Potato Put Selling Strategy
The Country Potato Put Selling Strategy is for those investors who want to do as little homework as possible. They don’t want to look at technicals or study charts. They simply want to get into the stock within fair-value.
To do this as simple as possible, go one year out to January 2014 and sell the January 2014 naked puts at the $65 put strike and the $60 put strike. Here are the results:
Put Selling Boeing Stock Jan 18 2014 Puts
No commissions are taken into account on any Put Selling trades or figures shown
5 naked puts sold 18Jan 2014 Options Expiration at $65 put strike for $3.80 = $1900
5 naked puts sold 18Jan 2014 Options Expiration at $60 put strike for $2.50 = $1250
Total income from Put Selling = $3150.00
January 2014 Options Expiration
If after Put Selling should the stock fall by January 2014 to below $60.00 and Adam is assigned, here is his position:
500 shares assigned from Put Selling the $65 strike = 500 X $65 = $32500.00
500 shares assigned from Put Selling the $60 strike = 500 X 60 = $30000.00
Total cost for the shares = $62,500.00
Less income earned from Put Selling = $3150.00
Total cost of shares = $59350.00
Cost per share = $59.35
Through Put Selling using this very simple couch potato strategy, Adam would be in the stock below the fair value of $60.00 which should make selling covered calls simple.
If Boeing Stock does not fall to $60.00 or below by January 2014 his return is $3150 earned through Put Selling against capital of $62500 for a return of 5.04% which is almost double the return of the dividend.
This is a very simple Put Selling strategy requiring little work on the part of the investor. The return however can be dramatically improved through a few techniques that are simple but can dramatically boost the returns and provide a lot more flexibility to the trade.
Let’s examine these adjustments and the improved earnings.
FullyInformed Members Put Selling Strategy Article
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