Bull v. Bear: GE Strength in BA Partnership, Brace for Some Earnings Turbulence

get your podcasts. Welcome back to Fast Market on Schwab Network. GE aerospace set to deliver its quarterly results tomorrow morning. Here's where expectations stand. Wall Street is projecting earnings of a buck $0.86 per share. On an adjusted basis, that would be up more than 12% from a year ago. Revenue is expected to approach $12 billion, which would also be a double digit increase. Its engine and services division has been the primary driver, with that segment growing in Q1 by more than 30%. Shares of GE aerospace, outperforming the broader market year to date are up about 35% on a year over year basis. The question is, can that momentum continue? All right. Time now for the tug of war on GE aerospace for that. Let's welcome back in our co-host Tom White and Kevin Henkes. Guys it is bull versus bear time. So before we get to your example trades, we got to get your thoughts on GE aerospace stock is actually holding on to a gain even as we have a market that is flagging right now. Kevin, I'll start with you. What's your take? GE aerospace GE jet engines very close to my heart Diane. This is a company that's dominant in engines. Think about this. They are the only engine provider for Boeing 737 Max fleet. That's it. And remember there's basically a duopoly in planes but not necessarily a duopoly in engines. And when it comes to Airbus, they compete with Pratt and Whitney for the Airbus contract. But Pratt and Whitney has been going through problems. They've had reliability issues and cracks in some of their engines. So they have a dominant place. They've got a massive backlog. And by the way, people think, oh, they sell jet engines. Yeah, they also service them. Two thirds of their revenue is service of the engines that they sell. So this is a company positioned extremely well for their futures. I don't know if it's going up or down, but their future is pretty much in line with their massive backlog of orders. Tom, what's your take? Yeah. Kevin mentioned the backlogs. If you looked at it, what they saw in services growth, that was up 49% year over year last quarter. And then orders growth was that was up 87%. And then spare parts. You got to remember that. And they're not only servicing they're selling spare parts. These you know, these plane, you know, aircraft or airlines are keeping these planes longer, right? So you need maintenance. And that's the big draw is the backlog. And those services of the jet engines that they have. Now last quarter, they grew revenue by 29%. That was above expectations. They're expecting another solid quarter here. You wonder what the disruptions in the Middle East are going to have on the quarter. Was that a drag down our costs rising also. That's one of the things. Will it hurt margins a little bit. But Kevin's right. They're winning in this space. Whether they compete with Pratt and Whitney or Rolls Royce on the engine side. But just watch the numbers that they have for the servicing and the spare parts, because that's been what's driving not only the revenue side of it, but the margin side of it also. And that's been the big winner for them. And they did just sign another deal with United Airlines for their seven, eight, seven planes. They're going to supply all those engines. So their order backlog continues to grow. Also, okay, let's get into the example trades. Kevin, let's start out with yours. What's your approach today. So so this deck has had a great run. And since oh let's call it mid April. But it's backed off just the last couple of weeks ahead of their earnings. So what I looked at is something to take advantage of that and look at the expected move. Thinking about 15. Well it was 15. Now it's about $16 almost $17. And I looked at something in just the one week, $370 call calendar. And so taking that higher implied volatility of the front expiration, about 84.5, selling that and buying the July 24th, which is trading about 50.5. And so doing the 370 call calendar trading. I put it in 235. It's trading less than that now. It's trading below $2. So this is one that you can get relatively inexpensive. But remember you're looking for a move a bullish move up towards 370. It's got a long delta. So this is a bullish move. Now there's a range bound aspect to this trade. But certainly you want to move to be stay here or move towards 370. Diana. Tom this is just a one week play. Looking for a little bounce back off the recent sell off. Yep. Let's take a look at this one. Just a one week wide upside call calendar here on the 370 strike. Buying the July 24th weekly 370 call that expires in nine days. Sell that same 370 call in the near term July 17th. Monthly options that expire in just a couple of days here. 235 debits. What we got up here it's trading closer to 180 right now, so price discovery may be warranted when entering positions like this if there's wide bid ask spreads. But the debit you pay, whether you pay a buck 80, it's $180 in risk. If you pay 235 like we've got here, $235 per risk. And you can see here from the risk profile, the apex of profitability at or near that 370 strike. But you've still got a nice wide range from about 355 on the downside, maybe 385 on the upside, where you could be potentially profitable on this. So giving you upside exposure, limited amount of risk, you're not paying a lot for, you know, this is a $355 stock and you're only you're paying less than or around $2 for a one week wide call calendar on that. Now, if you look at the vol dispersion that we always talk about on these strategies, well, implied volatility in the near term really elevated in that July 17th options you're selling about an 84% implied volatility on aggregate in that series. On that 370 call, buying about a 50% implied volatility on aggregate in that July 24th. Weekly options where you're buying the 370 call. So that dispersion lowers the entry point price. But this gives you upside exposure. What don't you want to happen? You don't want the stock to fall. You don't want the stock to move more than maybe a two standard deviation move to the upside. The option market is pricing in about a plus or -$17 move in either direction on a one day basis. So keep that in mind. So this 370 strike aligns with a move to the upside about what the option market is pricing in at this point. Kev. I looked at something a little bit different but a little bit more passive where I can still be wrong and still be potentially profitable. I looked at a short call vertical. It's neutral to bearish here. And I just went to the July 17th monthly options here or that expired in two days. So really short term positioning and earnings type example trade here. I'm going to sell the out of the money 370 strike call and then buy the 380 strike call. So it's risk defying short $10 wide neutral to bearish call vertical. You're collecting a credit of roughly about 220 on this one. Now that one's lower now too. Maybe it's about a buck 70 on that. So you've got to take that into consideration where the stock is and the moves. But if you collect a 220 credit, that's what you can make with 780 bucks at risk. But it takes your break even up to three, 7220 to the upside on there. So you're giving yourself almost that one standard deviation. Move to the upside before you get to that break even. This has got a higher probability of success. Stock can fall. Stock can stay right here or stock can go higher. You just want it to remain below that short 370 strike in this trade Kevin. But it's you're using the higher probability of success Kevin to take still a directional bias trade. But you've got a nice cushion to the upside. The similarities between these two trades. Tom and I both used the math to figure out the short strike, which is the 370 strike in line with the one standard deviation expected move. Mine is bullish and Tom's is bearish, but both focusing on the 370 strike Diane. So if it goes right to 370 both are profitable Diane. Okay. All right. Tom any final thought you want to leave us on any of these example trades here. No I mean that's the whole thing with this. Kevin says we use the math. When you look at the option market is pricing in right. That's not you know set in stone. It's just kind of based on supply and demand of where people are willing to buy and sell things. Implied volatility levels are elevated in the near term. Options. On my example, I'm taking advantage of that higher implied volatility. And Kevin is too. But then he's buying something against his that's longer dated. That vol dispersion creates that that lower price entry point on this. Mine's got a lot more risk than potential reward. But the fact is I've got a better probability of success on my on my trade because I can be wrong where the stock goes higher. I just needed to stay below about that 372 level on this one. So both taking advantage of the near term implied volatility on these strategies. All right. Now GE