Dare you fly with 737 Max?

This is a question I often heard lately, even as recent as just a few days ago on TV. A JP Morgan analyst was asking such kind of question when he was talking about the snafu of Boeing. This is definitely a fair question. After all, who wants to risk their life. So there is no right or wrong answer but just some personal difference in facing this kind of situation. I can only tell you that I won’t mind taking 737 Max as long as its problem has been fixed with proper certification. And I’m even willing to bet 6 months from now, you will hardly hear anyone talking about 737 Max and you will see the airport as crowd as usual with 737 Max full of passengers. I may be wrong but that how I believe it will go.

Why I’m so confident to say that? Maybe sound counterintuitive but more serious the issue appears to be and more devastating the story looks like per the media coverage, more safe it will become in the end! Why so?  Well, both the company and the monitoring regulator will take extra caution and efforts in fixing the problem. Without more than 100% assurance, they dare not to let it fly again! That’s why I will be more than happy to take it if it is allowed to fly again. That’s how my thinking goes. You don’t need to follow me but I’m pretty sure very soon people will totally forget about this. Believe me, we human beings have very short memory nearly for everything!!

Of course, I’m not here to tell you whether you should take 737 Max or not. I’m more interested in the money making opportunity and such kind of snafu for a good company is virtually always a good opportunity to make some money. Before I tell you why, do you recall the huge environmental disaster the oil giant BP had caused 10 years ago? If you are too young or you have too short memory, here is the recap what had happened back then.

In 2010 BP had a huge accident with open sea oil spill due to explosion on the Deepwater Horizon oil rig located in the Gulf of Mexico.

Indeed, it was an environmental calamity, and a number of people lost their lives in the tragedy. CNBC's Jim Cramer went so far as to call the stock "unownable." That week, the New York Times wrote...”It seems unthinkable, even now, that the disastrous oil spill in the Gulf of Mexico could bring down the mighty BP. But investment bankers get paid to think the unthinkable – and that is just what they are doing. The idea that BP might one day file for bankruptcy, particularly as part of a merger that would enable it to cordon off its liabilities from the spill, is starting to percolate on Wall Street.”  No need to say, its shares had gotten absolutely clobbered, falling from around $60 in April to a low of $27 in June. 10 years has passed and of course no one is talking about PB’s accident anymore. Actually only just 2 months later, it was back to $40s already.

Sure I’m not saying what happened to BP is identical to the BA snafu. It is different and Boeing’s problem is much more affecting ordinary people’s life. However, the reaction to crisis is mostly the same as far as I can see. That’s why I said to take the opportunity for the Boeing crisis (see here). I made some money 10 years ago with BP and I’m making money again with BA as well. The rationale for me are straightforward:

• Even as severe as the accident is for 737 Max, it is not a structural problem that would have been much more difficult to tackle for Boeing. As a software issue, it is a lot easier to resolve, only a matter of time.
• Grounding of this best selling model plane and some cancellation or delayed ordering of the plane has certainly weighed in negatively on Boeing’s bottom line. If Boeing were solely or largely dependent on this model, then it would face a great deal problem but it does not! Its business is way beyond this model regardless how important it is. It has many years of backlog for a wide range of aero products and not to mention it is one of the biggest companies for military orders.

Even though it is a huge pain for Boeing for sure due to this tragic incident and it has been duly punished with a sharp decline of the stock price, it is a temporary setback with no long term damage whatsoever. Anyone thinks otherwise is very shortsighted as those typically seen in Wall Street! That’s why the Street reaction to the issue, although necessarily, is usually overdone. Much of it is probably driven by the herd chasing up after initial selloffs. That’s why it has created a great short term money making opportunity even if you are not interested in the long term. Here is what I have done a few weeks ago when it started to tumble. I have two positions. One is similar to covered calls but using options to play, a deep in the money call spread ($350/370). The panic selloff has caused a jump in the call premiums very much. So incredibly a few weeks premium for the spread has given me an opportunity to make 50% gain as long as BA did not close below $370 on Apr 18. More importantly it is extremely safe as I wouldn’t lose a penny unless BA closed below $363 on Apr 18. So this is a very conservative safe income trade to bet BA would not further drop too much after its initial huge selloff. Yes, I got the full 50% gain by now as BA closed way above $370 yesterday (at $381 actually). Then I’m still holding a more speculative option trade to bet BA has a chance to rebound towards $400 or even higher by May 17. So far so good as BA is indeed bouncing nicely lately. I’m looking for a double but it is too early to call a victory as of now. My fingers crossed!

Just be clear, I’m not saying BA has necessarily been out of the woods completely by now. It may still suffer from headline risks with substantial volatility in place. So don’t be surprised to see BA to fall back again from the current recovery. But I think its charting suggests the $360 is likely its bottom area for this correction. Unless something more devastating emerges, I think BA’s general trend is going up from here.