Alleged fraud… major manufacturing and safety issues… whistleblowers revealing management cover-ups…

It would be bad enough if we were talking about a run-of-the-mill company.

But the allegations arose against Boeing (BA). It’s one of the globe’s largest defense and aviation manufacturers.

And the results for its stock price and reputation were brutal… especially given that as much as 40% of BA’s revenue comes from government contracts.

It was enough to cause BA to tank over 40% from its December 2023 high through April this year. And as of June, it has been the second worst-performing stock in the Dow Jones Industrial Average.

All the talking heads and other pundits advised folks to dump the stock.

But this is the exact type of scenario I am looking for. It plays right into my mean-reversion strategy…

We look for a stock that has become overstretched in one direction.

Then we look to profit when it snaps back the other way.

Sometimes ignoring all the experts and following the chart instead can lead to the best trades.

Just like it did with BA…

In just three days, we made a blended 51.8% gain in The Opportunistic Trader.

Over the past 10 years, Boeing’s average annual gain is around 5.3% (with reinvested dividends).

So you could’ve made a decade’s worth of returns in three days off this one trade…

A Chart in Free Fall

You can see BA’s December 2023 peak in the chart below…

That top and reversal coincided with the Relative Strength Index (RSI) peaking (red circle). And it retraced from overbought territory (upper gray dashed line).

BA’s fall gathered speed as the RSI fell sharply into the lower half of its range:

Boeing (BA)

Source: eSignal

But while the bad news for BA kept on coming, BA had already bottomed on April 25 (“1”).

That coincided with the RSI forming a small “V” and rallying from oversold territory (lower gray dashed line).

BA made a series of higher lows at “2” and “3” as momentum steadily climbed. It was a classic bullish pattern.

As the chart shows, each higher low correlated to a switch higher in momentum. That’s signaled by the black arrows in the bottom part of the chart…

BA kept gaining momentum after the higher low at “3.” So we bought a call option on June 25 to profit from any further up move.

In simple terms, a call option increases in value when the price of the underlying stock rises.

But if that anticipated move doesn’t pan out, the most you can lose is the premium you paid for that option. In this trade, that was $415 per contract.

As you can see, the move we anticipated played out quickly. BA rebounded as momentum returned.

So we decided to lock in some profits by selling half of our position just two days later.

Take another look:

Boeing (BA)

Source: eSignal

That let us bank a 56.6% gain in two days. And it left the remaining half-position open to capture any further up move.

But after trying to rally the following day, BA started to pull back as momentum waned…

So rather than risk giving up profits, we decided to exit the trade. We sold the remaining half of our position on June 28 for a 47.0% gain.

All up, we generated a blended 51.8% gain in just three days. That translates to nearly $215 in profit for each contract we traded. So if you traded two contracts, you made nearly $430, and so on.

Try replicating that with a buy-and-hold strategy!

Always Know Your Risk

Just to be clear, we made this supersized profit in such a short period by using options…

By trading options (rather than just buying shares), we magnify both the gains and losses in the trade.

For example, if we’d just bought BA shares, we’d only have made around 4% on this trade.

And options have an expiration date. That means time decay is always eroding the option’s value.

If the trade doesn’t work out, your option can expire worthless. That’s the risk you always need to consider.

But when you get it right, as we did with this BA trade, you can see the type of rewards on offer.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict