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The Options Wheel Strategy: Trades



  • Registered Users Posts: 1,664 ✭✭✭marathonic

    Stock: Airbus

    Share Price at time of trade: €161.06 (€163.86 share price less €2.80 drop due to upcoming dividend)

    Strike of Option: €150

    Premium after commissions: €1.50

    Cost Basis If Assigned: €148.50

    Downside Protection: 7.8%

    Return if unassigned: 1% (37 days)/9.9% (annualised)

    I've been in and out of Boeing and Airbus at various points over the years. On a price/sales basis, Boeing looks much cheaper at present (1.4 times sales versus 2.04 for Airbus). However, Boeing has been making losses for years and the current quality issues are only going to exacerbate the problem. There is going to be a significant drain on cash as they ramp up their quality control. If they can get their ducks in a row, they will likely outperform Airbus in the coming 5-10 years - but the risk is high.

    Also, as they try to get a firm handle on quality issues, they are looking to buy the $3.9 billion supplier Spirit AeroSystems back. For a company with so many issues needing addressed, Spirit AeroSystems is trading significantly higher now versus 6 months ago - likely investors anticipating a premium over market value.

    However, Spirit AeroSystems generates a fifth of their revenue from Airbus. They don't really want this business and Airbus have confirmed interest in parts of it. A lot of the Airbus business within Spirit AeroSystems is loss-making so I suspect Airbus will either buy parts of it at an extremely good price or force Boeing to buy them out of these contracts.

    One of Boeings major customers, Ryanair, had their CEO state on Bloomberg recently that, were Airbus 5% cheaper than Boeing, Ryanair would buy from them. I question whether Boeing can remain cheaper considering the losses they've been making for years and the additional costs as quality control ramps up. Perhaps they were undercharging for their planes in an attempt to spur growth beyond that of Airbus.

    It's a very uncertain future for both but I'm willing to pay a premium over Airbus right now. They may not be able to spur much growth in jet deliveries due to difficulties in ramping up supply-chain - but their margins should improve as they should be under less pressure to compete with Boeing right now. For example, would EasyJet really consider moving to a deal with Boeing if their next order is priced a little higher per unit?

    As of February, they were already guiding for an EBIT Adjusted rise from €5.838b in 2023 to €6.5b - € 7b for 2024. I believe guidance will only improve if they're able to raise prices due to a reduced need to compete with Boeing.

    For example, in 2023, their net income was €3.789b on €65.446b sales - and this translated to €4.80 earnings per share. If they had been able to charge 1% more for sales whilst keeping all other expenses the same, net income would have increased to €4.443b and EPS would have increased to €5.63. In other words, the 1% increase in sales price, with all other figures being equal, would have increased EPS by over 14%.

    I do think Boeing will be fine long-term but Airbus is the profitable one and I feel that, in the short-medium term, their profits will rise whilst Boeings expenses, and hence losses, will rise.