Airline stocks have been one of the few clear beneficiaries from crude oil’s most recent decline. While the group caught a massive bid today, there is an interesting bifurcation as it relates to year to date performance in the sector. On one side is the more domestic/ discount companies, Southwest (LUV) making new 52 week high today, up 17% on the year, Alaska Air, up 44% on the year, making a new intra-day 52 week high, and Jetblue (JBLU) up 67% on the year, only 2% from its 52 week highs. On the flip-side you have the legacy carriers, American (AAL) is down 15% on the year and down 18% from its 52 week highs made in January, United (UAL) is down 10% on the year and down 18% from its 52 week highs made in January, and Delta (DAL), the major with lots of international exposure, now just 1% from its 52 week highs, but only up 5% on the year.
There was a large near term bullish roll in DAL options this afternoon when the stock was $51.50, just $1 from its all time highs. The trader sold to close 22,000 Dec 11th weekly expiration 50 calls at $1.64, or about $3.6 million in premium and rolled the proceeds, out and up to buy 45,000 of the Dec 18th regular 52.50 calls for 77 cents, or about $3.5 million in premium.
I think its safe to say that this trader is targeting further weakness in crude. That weakness could be aided between now and Fri Dec 18th as the Fed’s rate increase at their next FOMC meeting a week from Wednesday should keep a bid in the US dollar.
This trade only works if DAL breaks out to new all time highs. The break-even for this trade on next Friday’s close is up about 3.5% above the prior highs:
Short dated options prices are about as cheap as they have been all year in DAL, with 30 day at the money implied vol at about 31%. This makes short term long premium options trades a relatively attractive way to express a directional view.
But as always, we will offer our usual event trade disclosures for those who might be drawn to this sort of strategy. You need to get a lot of things right in a short period time just to break-even, nothing more important than direction, timing and magnitude of the expected move.