New Trade – $UAL: Not So Friendly Skies

by Dan October 9, 2014 10:01 am • Commentary

Tuesday morning in this space, I detailed the potential for the Ebola scare sweeping the world (warranted or not) to disrupt business in the travel industry, most namely international travel (MorningWord 10/7/14: Fearing Fear Itself):

The fear of the unknown with the potential spread of Ebola could be different. Experts agree the chances of a global epidemic are tiny. But reality and perception are two different things when it comes to risk events and financial markets.


I don’t speak of this with any intention to incite fear, I merely highlight the fact that if there were known cases of Ebola finding their ways to the U.S. by international travelers, I sure as heck would not want to be traveling those routes. I would reconsider international travel all together. Whether the real risk was minuscule or not, the potential impact from just the headlines and the concern could be enough to cause a 5-10% drop in traffic, significant enough to affect airlines results over the next few quarters.


The risk of Ebola spreading in the U.S. is not high (thousands will die from the flu, probably zero from Ebola) but the risk of fear spreading to the airline stocks is real.

Maybe the idea seemed a bit obvious, but shares of U.S. carriers with the largest international exposure had a bad couple of days as media attention seemed to intensify with our first fatality on our shores yesterday.

United (UAL) is up this morning better than 6% on the acknowledgement that September traffic dropped less than many feared (here).  We think this morning’s strength should be faded as further cases of Ebola either here or in Europe could cause the stock to break yesterday’s lows with no news expected from the company until earnings due the week of Oct 22nd.

TRADE: UAL ($45.70) Bought Nov 45/35 Put Spread for 2.60

-Bought 1 Nov 45 Put for 2.90

-Sold 1 Nov 35 Put at .30

Break-Even on Nov Expiration:

Profits:  between 42.40 and 35 make up to 7.40, or about 3x premium risked, max gain of 7.40 at 35 or below

Losses: between 42.40 and 45 lose up to 2.60, max loss of 2.60 above 45

Rationale:  We want short delta exposure given the volatile nature of UAL’s recent moves, and the fact that the July low near $37 is nearly 20% away after today’s bounce, but implied volatility is over 50, so we decided on a near-the-money put spread rather than buy an outright put.  We will give this trade more than usual leeway given the volatile nature of UAL.