Event: Delta Air Lines (DAL) is set to report Q3 results tomorrow before the open. The options market is implying about a 3.5% one day move tomorrow, which is rich to the 4 qtr one day average of 2.4%, but shy of the 10 year one day post earnings average move of 5%.
What’s fairly striking is that the stock has a near stellar history of rising the day of earnings. You have to go back to their Q3 report in Oct of 2012 to find the last time the stock declined the day the company reported, per Bloomberg:
Shares of DAL are down 22% in 2016, one of the worst performing major carriers in terms of performance, with United (UAL) and Southwest (LUV both down 7% and American (AAL) down about 11%.
The two year chart of DAL shows what was healthy technical support at $40 for most of 2015 until June 2016, which might serve as near term resistance given the recent failure to breakout above:[caption id="attachment_67052" align="aligncenter" width="600"] Bloomberg[/caption]
Despite the stock’s poor ytd performance, Wall Street analysts remain overwhelmingly bullish with 13 Buy ratings, only 3 Holds and no Sells with an average 12 month price target of $50, 25% above where the stock is currently trading, 5% below its 52 week highs.
DAL is clearly a cheap stock, trading about 7x GAAP eps expected to grow 6% this year, but decline 9% next, on a 3% sales decline in 2016 and an expected 2% rise next year.
So What’s the Trade?
For those looking to try to catch this one after the sell-off, defined risk is the way to go as a breakdown below $38 could mean a quick visit to $36 or lower. One way to do that is to target a decent sized upside move in December while limiting risk to just $1 (less than the implied move on earnings):
In lieu of 100 shares of DAL (39.15)
Buy the Dec 40/45/50 call butterfly for $1
- Buy 1 Dec 40 call for 1.75
- Sell 2 Dec 45 calls at .41 (.82 total)
- Buy 1 Dec 50 call for .07
Rationale – This trade breaks even at 41 and has potential profits up to 4.00 above with a max gain of 4.00 at 45 on Dec expiration. Profits trail off above 45 but the trade is not a loser until above 49, way above where the stock is currently trading.
For those already long the stock, a hedge makes sense, but not one that spends much money:
Against 100 shares of DAL (39.15)
Buy the Nov 38/36 put spread vs Selling the Nov 43 call, for 20 cent debit.
- Buy 1 Nov 38 put for 1.30
- Sell 1 Nov 36 put at .70
- Sell 1 Nov 43 call at .40
Rationale – If the stock is between 38 and 43 on Nov expiration this hedge will have cost .20 versus gains or losses in the stock. However, the stock is protected from 38 to 36 (less the .20 paid) so it can provide up to 1.80 in loss protection. Above 43 the existing stock is called away but that is nearly 10% higher in the stock.