Bulls reserve their seats on major airline
05/24/17

Airlines appear to be back in ascent, and now the bulls think one major carrier is ready to take off.

The group hit a downdraft early this year following a rally of more than 20 percent in the final months of 2016. But news has been more positive recently, and the NYSE Airline Index is starting to edge back ahead of the broader S&P 500.

Yesterday a big options trader placed a hefty bet on Delta Air Lines (NYSE: DAL), apparently looking for the world’s No. 2 carrier to break out this summer. The trader purchased 15,000 July 50 calls for $1.45 and sold a matching number of July 55 calls for $0.28. Known as a vertical spread, here’s what it means:

  • Calls fix the price where and when a security can be bought. In this case, they can buy DAL shares for $50 by the third Friday of July – no matter how high it may be above that level.
  • Selling the 55 calls obligates the investor to deliver shares for $55 if they’re above that level over the same timeframe. 
  • They’ll collect the $5 difference between $50 and $55 if DAL is above the higher price by expiration. 
  • Placing the trade cost $1.17, not including commissions, so that’s a potential profit of 327 percent.
  • DAL rose 0.21 percent to $48.59 yesterday. A gain of another 13 percent will yield the maximum return. Breakeven is at $51.17, and the entire position will go worthless if the stock remains below $50.

DAL has repeatedly stalled around $52.50, so the buyer of the spread is looking for a breakout through that resistance zone. Experts attribute the stock’s grind to more than a year of angst over weak fares.

Delta Air Lines (DAL) 1-year chart

Source: OptionsHouse by E*TRADE

Sunshine poked through DAL’s clouds on April 12 when earnings beat estimates and management said ticket pricing was finally getting better.1 It failed to rally on that report but did accelerate higher on May 2 after monthly numbers showed another gain in dollars received per miles flown.2 It also said fewer seats were going unfilled.

Maybe the good news is contagious because larger rival American Airlines (Nasdaq: AAL) surged on the heels of its own strong traffic report a week later.3 There’s also been some positive news from Omaha, Nebraska, where famed billionaire Warren Buffett’s been tucking away shares of AAL and Southwest Airlines (NYSE: LUV).4

In a similar vein, other travel-and-leisure companies like Marriott (Nasdaq: MAR), Hilton Hotels (NYSE: HLT), Carnival (NYSE: CCL), Royal Caribbean (NYSE: RCL), and Wyndham (NYSE: WYN) have been hitting new highs and raising prices.

Tuesday’s spread in DAL was the largest options transaction in a single-name stock for the day. It pushed total options volume in the company to more than twice the average in the last month, and calls outnumbered puts by a bullish 5-to-1 ratio.

Bottom line: Traders are positioning for a breakout in DAL as airlines and other travel stocks appear to have taken liftoff.

 

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1. Marketwatch.com: Delta Air Lines's stock surges after profit beats expectations. 4/12/17.

2. Motley Fool: Why Delta Air Lines Shares Ascended 5%. 5/2/17.

3. Marketwatch.com: American Airlines record April traffic stock rally. 5/9/17.

4. Fox Business: Buffett Predicts These Airline Stocks Will Soar. 5/15/17.