Profit From Boeing's Turbulence

NEW YORK (TheStreet) -- I received many questions about Boeing (BA) in the last couple of days. The common question is if Boeing is a value buy due to headline price pressure.

Boeing may become a value buy, but the shares are only down about 10%. it's not there yet. Boeing may be a good stock to own but it hasn't reached value status as a result of the battery problems yet.

If the Dreamliner issues are fixed fast, and I mean really fast, investors can expect a slow and steady recovery. Keep in mind that stocks tend to drop much faster than they move higher. We do have an idea of what can happen.

As you may recall, during the summer of 2010, the Gulf of Mexico had a major oil spill that put into question the future of several companies. BP ( BP), TransOcean ( RIG), and Haliburton ( HAL) share prices were hit hard and the problems dragged on for months.

Boeing has everyone and their regulatory brother putting a microscope on the Dreamliner aircraft. Boeing has the potential to have a constant stream of new issues that it will need to fix for the next two or three months. In the meantime, Boeing shares will continue losing altitude as long as problems stay in the news.

The fear isn't that the planes have a potential battery fire problem -- that is fixable and will get worked out. The real fear is that other issues will be found during the examination, and this will drag on. Enough negative news and Boeing may suffer a shift in market sentiment.

Apple ( AAPL) recently suffered from a shift in market sentiment that resulted in a 30% drop in share price. Valuations and fundamentals were thrown out the window, and people sold because of fear the shares would continue falling lower.

It turns into a self-fulfilling feedback loop, and it can get ugly. Look at the negative feedback loop BP endured.

I traded BP during the entire Gulf mess, and I crunched the numbers to account for every possible scenario. Because of corporate entities, BP wasn't facing a complete liquidation and yet it was reported in the media that it may go out of business. After two years, BP shares have not fully recovered.

During the gulf spill with BP, and more recently with Apple, the way to protect your portfolio was to use options. You don't have to buy expensive puts to protect your shares if you believe Boeing will exit on the other side and you have no intention of selling your shares. For the record, I view this event as a setup to buy shares, but I will get to that in a moment.

If you own Boeing and simply want to sleep better at night while the company travels through the current turbulence, sell call options against your shares. You have an almost zero risk of having the shares called away before expiration day if you sell back month (ex. May or August expiration) out of the money calls.

If Boeing recovers and trades above the option strike price, no problem -- simply buy the calls back before the expiration. Shares may increase in price and you may lose money on the options, but consider that an insurance payment that lowered your risk in case Boeing continues to trade lower.

Chances are the increase in implied volatility will enable Boeing investors to gain if Boeing stabilizes soon anyway. If the mess continues for long and Boeing takes its time like BP and Apple, then selling covered calls makes even more sense.

If you're bargain hunting with Boeing, you may wish to sit on your hands for a while. The shares haven't fallen very far considering the headline risk. The only possible upside to buying here is that the issue clears up within the next few days AND sentiment doesn't shift.

For long-term buy-and-hold investors who want to gain exposure regardless of the price (maybe you're seeking a dividend), you may also want to consider exploiting the fear pushing option premiums higher. An idea for entry may be to sell the February $77.50 strike price put option for a current price of $5.

By selling put options instead of buying the stock immediately, you decline your total exposure from a current share price of $73.40 down to $72.50. If Boeing shares increase above $77.50, your total gain is capped at $5, but a 6.8% gain in less than a month isn't bad. Shares need to trade above $82.50 before buying shares directly increases an investor's profit over selling puts.

Lastly, remember that the key to investing is not to try to make the most money on any given investment, but to gain the most edge you can while managing risk.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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