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As goes Boeing, so goes the industrials.
Shares of the aircraft manufacturer have sunk more than 13% in the last few weeks, as the company faces continued fallout over its 737-Max planes. The industrials sector has managed to shake off the Boeing fallout, rising more than 1% since the Ethiopian Airlines crash involving a 737 Max in mid-March, but that is about to change, according to one trader.
Boeing makes up just under 9% of the industrials ETF (XLI) that tracks the space, and after American Airlines trimmed first-quarter guidance due to the 737-Max grounding, Dan Nathan of RiskReversal.com suspects the damage could begin to spread to the sector.
“Today was kind of interesting,” said “Options Action” trader Dan Nathan on CNBC’s “Fast Money” on Tuesday. “There were a lot of [volatility buyers] in the XLI, playing for movement between now and May 3 expiration.”
Specifically, Nathan noted these traders were buying the May 3 weekly 76-strike straddle for $2.40.
“That’s buying the call premium and the put premium. When you put that together, you’re basically buying the implied movement between now and May 3” said Nathan. “That trader is making the bet that the XLI will be, at least, above $78.40 or below $73.40 by May 3 expiration. They’re playing for movement of about 3% in either direction.”
As Nathan points out, there are plenty of reasons that a trader would make this kind of bet, as Boeing’s future – and therefore the future of the XLI – remains uncertain ahead of the company’s earnings report later in the month.
“Boeing has been very volatile. It’s the biggest component in the group, it’s still up 15% on the year. The XLI is up 20% on the year, besting the 15% gains in the S&P 500,” said Nathan.
“We know that Boeing is going to give guidance when they report Q1 [earnings] on April 24, and we’re going to get some other earnings reports from other large components of the XLI over the next few weeks.”
When it comes to which side of the straddle Nathan thinks the XLI could end up on at this trade’s expiration, he points to the charts.
“It has been rejected a couple of times at $76.50,” pointed out Nathan. “That looks to be some short-term technical resistance.”
As for long-term resistance, Nathan points to the fact that the XLI has quite a gap to fill before it hits a downside level of support.
“It never made a new high here, and it has been in a downtrend since its all-time highs in January [2018]. It obviously has some support down at the $70 level, but I think it’s important to remember that this ETF went down $20 in a straight line – from about $80 to $60 – during the Q4 downdraft,” said Nathan.
“A material guide down from Boeing, if we hear it straight from the horse’s mouth, will affect the XLI, and obviously, the push-out of any trade deals could be a headwind to this group.”
The XLI was slightly lower Wednesday.
