Big Printin’ – No $LUV for Airline Stocks

by Dan December 8, 2015 3:34 pm • Commentary

Airline stocks were the clear beneficiary of the washout in crude oil yesterday, as detailed in this space highlighting a large bullish roll up and out that took place in Delta (DAL) calls (here):

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.

Oh what a difference a day makes.  This morning Southwest Airlines (LUV) guided down their revenue per average seat (RASM) for the 4th qtr, below guidance given just a month ago.  LUV shares are down 9% as I write, and down 12% from yesterday’s intra-day high that was also a 52 week high:

LUV 1yr chart from Bloomberg
LUV 1yr chart from Bloomberg

The two day reversal is obviously nasty, with the stock finding what for now seems like support at its 50 day moving average (purple line) just above $44, but with little support below until you get to its flat-lined 200 day moving average (yellow line) just above $40, another 1o-ish% lower.

As my friend and chart master Carter Worth of Cornerstone research likes to say; “draw the lines anyway you like, but this is the way I see them”

The way I see them (and draw them) shows the stock at a fairly important spot.  The red line, which represented prior resistance, resulted in a breakout and bad failure, that level at $47.25 should serve as resistance:

LUV 5yr chart from Bloomberg
LUV 5yr chart from Bloomberg

Looking down, there are two uptrend lines worth keeping an eye on off of the mid 2013 breakout in the teens which resulted in nearly 200% gains in the next 18 months. The stock has not come back to the first trend-line (green), with little support till $40 (as mentioned above), but a re-tracement to the lower trend-line would place the stock in the high $30s.

Obviously I have no idea where the stock is going based on the data, the price of oil or the charts. And today’s options activity in the stock offers few clues.  Total options volume today is 6x average daily volume, with calls outnumbering puts slightly (35k to 27k). Despite the most active strike 7800 of the Jan 45 puts, the next three most active strikes are all calls.  Many times on a large volume and percentage move day like today you will see unwinding of existing trades, where traders are either taking profits, monetizing hedges or rolling directional bets to better align with the new price range.

Oh and one last thing, I wanted to share a tweet that was sent my way in response to my DAL post from yesterday, which I agree with 100%.  My response was simple, and one that regular readers will be familiar with: