If you’re in the market for (no pun intended) an options play based on earnings, the following article by Joseph Hargett has three to consider. He’s bullish on Boeing and Caterpillar, and he’s bearish on Exxon Mobil. He gives you specific option trades to make for each and he explains his reasoning for each.
As always, make sure you do your own due diligence. Don’t just take his (or anyone ele’s) recommended trades and run with them without doing your own research first.
The going has been rough for the Dow Jones Industrial Average (DJIA) during the past several weeks, as poor economic data from overseas is hamming U.S. stocks. The blue-chip barometer has had quite a few positive drivers at home, however, with a string of positive corporate reports among them. For instance, 3M Companies (NYSE:MMM) reported a 6.7% increase in first-quarter earnings to $1.59 per share ahead of the open this morning. Looking ahead, fellow Dow components Boeing Co. (NYSE:BA), Caterpillar Inc. (NYSE:CAT), and Exxon Mobil Corp. (NYSE:XOM) are on the docket this week.
Boeing Co. (BA)
Aerospace giant Boeing will step onto the earnings stage tomorrow morning, with analysts forecasting a profit of 96 cents per share on revenue of $18.45 billion. In the same quarter last year, Boeing posted a profit of 78 cents per share on sales of $14.91 billion.
Historically, the company is on solid fundamental footing, with Boeing beating Wall Street’s expectations in each of the prior four reporting periods by an average of more than 25%. The whisper number is currently indicating a first-quarter profit of $1.10 per share.
Sentiment toward Boeing is mixed, as investors digest the company’s strong fundamentals and poor short-term price action. For instance, brokerage firms, which typically take a long-term outlook, have doled out 22 “buy” ratings, compared to nine “holds” and one “sell.”
Short-term options traders, however, are focused heavily on bearishly oriented puts. Specifically, BA’s weekly April put/call open interest ratio of 0.85 indicates that puts are nearly in parity with call options. Since options traders tend to be more optimistic, especially ahead of earnings events, this skew toward puts points toward pre-event pessimism from this speculative crowd.
A bit of pessimism is healthy, however, and could work in BA’s favor if the company can pull off another stellar quarter. Technically, the shares have retreated in recent weeks, slipping toward support near their 50-week moving average in the 70 region. Overhead resistance, meanwhile, lies at the $75 level — an area that has held BA in check since December.
Traders looking to take a bullish stance ahead of earnings may want to consider a BA May 72.50/75 bull call spread (buying the lower-strike call and selling the higher-strike call at a net debit). This trade was offered at $1.02, or $102 per pair of contracts, at the close of trading on Monday. Breakeven lies at $73.52, while profit maxes out at $1.48 if BA closes at or above $75 when May options expire.
