Trading Boeing With Puts

This article originally appeared on RealMoney.com on Sept. 2, 2014 at 11:00 a.m. To read more content like this AND see inside Jim Cramer's multi-million dollar portfolio for FREE... Click Here NOW.

Identifying good companies is often easier than finding those same names at reasonable prices. Aerospace manufacturer Boeing  (BA)  has been posting record breaking results in 2013 and 2014 while significantly boosting its dividend, shrinking its float and maintaining a solid balance sheet.

The firm, which makes $90 billion in annual sales, certainly qualifies as a high-quality, industry-leading name you can own with the assurance it will be around for the long term. The question becomes: "Is today's quote a good entry point for new buyers?"

Boeing's average multiple over the previous seven years was 17.3x. Its dividend provided a 2.41% average yield. Last Friday, BA weighed in at a slightly lower P/E than normal but also with a slightly sub-par current yield compared to the 2007-2013 period.

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There were two instances since 2007 when BA was priced way too expensively. Buyers at 2007's peak paid about 20.5x earnings while accepting only a 1.34% dividend. That overpricing preceded five and a half years when the shares failed to progress.

Early this year, Boeing got even pricier. The stock ticked up to almost $145, 24.2x trailing EPS. As of last Friday morning, traders who bought at that January peak were sitting on paper losses greater than $18 per share.

Company perfomance and expectationsare are once again running hot but the shares, taking the recent pullback to the $126 range into account, are firmly mired in middle ground on a valuation basis.

A fine company at a fair price makes for a perfect set-up for writing (selling) long-term put options. You will either buy Boeing even cheaper or get paid without ever needing to own BA shares.

Sell some Boeing Jan. 2016, $120 strike price puts for $10.60, leave the position alone until expiration and only two possibiilities could play out.

If Boeing closes at $120 or higher and the puts will expire worthless, put writers will keep $1,060 per contract and no obligation will remain. If BA closes below $120 the put will be exercised and option sellers will be forced to purchase 100 shares per contract at a net cost of $109.40 ($120 strike less the $10.60 put premium).

Either alternative looks attractive. Owning Boeing at the "if put" price would represent a bargain P/E of just 13.3x this year's estimate. Today's quarterly distribution, likely to be higher by early 2016, would provide a generous 2.67% yield at $109.40.

Boeing shares have not been available below $110 since the middle of September 2013.

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At the time of publication, Paul Price was short BA Jan. 2016, $120 puts.

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