We’ve been down this road before. Traders getting excited, bullish option activity picks up and then…nothing. That was the tale of July 15. Many travel names began to surge, and option interest was high and very bullish. However, stocks don’t often run in a straight line and frequently the interest will build for a while before it begins to take off. On Tuesday, the options market was back at it for two airlines that are chomping at the bit for some normalization.
You can understand the hesitation for companies and political leaders to fully reopen. There is a significant percentage that are fairly entrenched in their fear of COVID-19, rightly or wrongly. Political leaders are going to take the worst case for virtually all policy given that understanding. Anything that might otherwise be normal of typical of other viruses can’t be considered normal or typical right now.
In June, there was a Congressional hearing on the transmission of COVID on an airplane. There was discussion of needing to arrive four hours early and having to submit to a nasal-swab test before entry on a flight. There was even testimony of the results of a simulation of passenger’s habits and the likelihood of contracting COVID while on a four-hour flight. The conclusion? That one to two passengers or crew members would contract COVID-19 if an infected person was allowed on board. While the transmission rate was found to be similar to that of the flu, that won’t “fly” in the current environment.
This understanding is why cruise and airline stock’s share price has failed to leave port. However, as some good news is popping up in hotspots in California, Texas, Arizona, and other states as U.S. coronavirus cases rose by only 55,000 yesterday, the slowest pace since July 7. Maybe turning the corner is creating the current glimmer of optimism.
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Here are two airline companies that saw a surge in option interest on Tuesday as their share prices rose.
Airline Stock #1: Southwest Airlines Co (NYSE: LUV)
Southwest climbed over 2% on Tuesday as the price is holding the $31 support level that it’s tested two other times in the past month. The company announced earnings on July 23 that missed expectations but so far hasn’t caused any real damage. The company had reached an agreement Boeing in December that has now paid them about $428 million in 737 max damages.
Since the earnings report, the company has seen significant negative revisions as current quarter EPS estimates have been cut from a $1.41 loss to a $2.21 loss and the current year has been cut from a $4.41 loss to a $5.80 loss. The fact that the price is holding on is an indication that some of the worst may already be priced in.
As you look at the option activity, there has been significant bullish interest on both Monday and Tuesday. On Monday, it was the 31 JUL 20 $31 calls that were being bought for an average price of around $1. On Tuesday, it was the 17 AUG 20 $34 calls being bought for around $1. This shows a near-term bullish expectation for the stock to likely test its $36 resistance or beyond.
Airline Stock #2: Delta Air Lines, Inc (NYSE: DAL)
Delta announced their earnings on July 14, the day before the breakout in reopening stocks. While the earnings missed expectations, the price failed to garner any bearish momentum. Since the report, the company has also seen significant negative revisions as the current quarter was revised from a $1.89 loss to a $3.01 loss and the current year was revised from a $6.90 loss to a $9.18 loss. Another example of large negative revisions with little movement.
On Tuesday, the call option volume was over 60% above average with over 40% of the volume getting filled at the ask. There was a lot of volume on the 31 JUL 20 $26 call option at over 28,000 contracts traded against an open interest of 5,611. There was also a large OTM trade filled in one print of 5,000 contracts on the 16 OCT 20 expiration that included selling the $18 put to help pay for the $40 call option. This was a cost neutral trade looking for a significant upside move over $40 by October’s expiration.