Thesis

After a faulty door plug incident on an Air Alaska flight using a 737-9 Max, BA stock swiftly plunged 23%. BA caught itself at $200: solid support level over the last 12 months. With the selling pressure on hold as the news flow has improved, I believe the stock is a prime candidate for a “fill-the-gap” trade back to $260.

Technicals

After falling from $260, BA eventually found support at $200. The $200 bottom coincided with a bottom in RSI and OBV, two indicators of momentum. Since bottoming at $200, the stock has recovered to the 200d SMA with a corresponding move in RSI and OBV. The improving technical picture suggests any positive catalyst has the potential to ignite a rally from the 200d SMA at $215 to reclaim $260. 

Catalyst

Earnings is the catalyst. BA will report 1/31 after the market closes. If management can reassure investors that the door plug incident is a minor setback, the gap to $260 should fill quickly. However, if earnings indicate a more significant issue with long-term implications, expect the $200 support to be broken.

As for earnings, there have been some positive developments. First, the Indonesian transport ministry has already begun putting the 739-9 Max back into service, suggesting any fundamental damage to their cash flow may be short-lived. Second, Airbus, their rival in the aviation duopoly, announced plans to double sourcing from India due to soaring demand for aircraft, which is encouraging for BA’s ability to provide a bullish future guide.

The Trade

This is a fill-the-gap trade. As such, the upside target is $260. The critical support level of $200 is the downside target. 

With an entry price of ~$215, the upside is ~21% to the ~7% downside. 

3-to-1 risk-reward. 

I entered the trade as of last Wednesday’s 1/17/24 close.  To protect my position, I bought puts at the $200 strike that expire 2/02/24 that coincide with the earnings release.