New Trade – $UAL: Priority Check In

by Dan January 22, 2015 9:37 am • Commentary

Yesterday, I outlined my bearish thesis for United Airlines (UAL) going forward, and wanted to wait for this morning’s Q4 report before expressing the view.  With the earnings and guidance out, and the stock up, I am going to use the strength to place a trade: 

TRADE: UAL ($71) Bought to Open Feb 70 / 62.50 Put Spread for 2.20

-Bought 1 Feb 70 Put for 3.00

-Sold 1 Feb 62.50 Put at .80

Break-Even on Feb Expiration:

Profits: between 67.80 and 62.50 make up to 5.30, max gain of 5.30 below 62.50

Losses: up 2.20 between 67.80 and 80, max loss of 2.20 above 70

Rationale:  Stock is breaking out from the recent base, and making new all time highs, while this is not usually a great situation to fade, the failed breakout recently in the home-builders (ITB & XHB) shows that not all breakouts are created equal.  It is my view that this is as good of time as any to express this bearish view with the news out and the stock up dramatically since the October lows at a time when oil is trying very hard to find a bottom.




Original Post January 21, 2015: Name That Trade – $UAL: Plane Geometry

On last night’s Fast Money on CNBC, we had a fairly spirited bull / bear debate on owning the airlines. I was on the bearish team, watch here:

I think both sides made some very good points and to their credit the bulls, Pete and Tim, have been consistently bullish on the stocks since the lows in October. But past performance is NOT indicative of future returns.  And not all Airline stocks are created equal in the eyes of low oil.

I want to make a couple points to synthesize my view:

-Airline  stocks have rallied in lock-step with the oil decline, most rising 50% as crude dropped by 50%, crude trying to bottom

-lower for longer oil means the end of very profitable fuel surcharges?

-companies like UAL and AAL still have very high leverage ratios with UAL total debt / total capital ratio of .38, AAL  total debt / total capital ratio of .36 and DAL at .22, UAL and AAL have some wood to chop before they are out of the woods and can consider meaningful cash return.

-Those that have benefited in the recent past from hedges may not be so fortunate on the next move, gains could be short term and reflected in stock’s current prices.

-if the companies lose their discipline and dramatically increase capacity we could see some of the lower fuel cost benefits erode

-synergies from consolidation likely to be squeezed out at this point

-carriers like UAL that rely a great deal on international routes could see negative effects of strong dollar and lower demand from a weak global economy.

Add that all up and yeah, I’m pessimistic about committing new capital here to the sector as we could be reaching an as good as it gets situation.  Yeah, the stock’s are cheap, but they are for a reason. This is a sector that has routinely shot themselves in the foot and should trade at a valuation discount to more disciplined players in the transport sector. Lastly, if Oil were to bounce hard, what would the reaction be in the stocks? I suspect down 10% in a quick.


UAL reports tomorrow before the open, the options market is implying about a 5% one day move in either direction. The report comes as the stock is trading at all time highs, breaking out from a very healthy flag formation:

[caption id="attachment_50105" align="aligncenter" width="600"]UAL 6 month chart from Bloomberg UAL 6 month chart from Bloomberg[/caption]

Options prices, while elevated, are not near the extreme levels from the Fall’s Ebola scare and should decline 20% from current levels after the print:

[caption id="attachment_50106" align="aligncenter" width="600"]UAL 1yr chart 30 day at the money IV from Bloomberg UAL 1yr chart 30 day at the money IV from Bloomberg[/caption]

Considering the parabolic move in the stock from $40 to near $70 in just a few months, directional bets with options, even with that elevated vol are probably fairly priced. But it’s tough to stick your neck out on a stock like this right before the event. We’ll circle back to this if we see a dumb move following the earnings.