by John Jagerson and Wade Hansen | February 24, 2014 10:12 am
A new bullish options trade on Delta Airlines (DAL) may seem like a strange one to be taking right now, what with all of the flight cancellation notices that recently went out due to the severe winter storms in parts of the south and northeast…but it is precisely because of the effects of these storms that we are recommending it.
You see, many stocks jumped to new highs, or at least back up to previous highs, earlier this month as the market has been rebounding. However, DAL and other airlines have not been able to join in the fun…yet. We anticipate that this is about to change as the storms move on and investors come back to the industry with the expectation of much friendlier skies in the spring and summer.
DAL has been steadily rising since December 2012 as business travel has picked back up, fuel prices have stabilized (and even come down during certain times of the year) and the airlines have been able to charge higher fares and fees. This last point is particularly important. DAL has been able to raise its fares without seeing a significant drop off in passenger bookings. When Delta released its latest quarterly earnings on Jan. 21, it announced that passenger revenues were up 6.1% and that it expects margin expansion during the coming quarters.
For those looking for an options trade, you can take advantage of this by buying the DAL June 33 Calls for a maximum price of $1.75. The shares have a strong uptrending support level beneath them, and we expect them to push above their Jan. 22 high of $32.92 in the near term.
You will notice that we are recommending calls with a June expiration date. That might surprise you, given the expectations we just outlined for DAL – but here is some background on that choice.
Keep in mind that each security is randomly assigned one of three expiration cycles. That’s because there are so many stocks and securities trading options that it would be very difficult for market makers to keep track of every single call and put, at each strike price, for each month of the year.
So they created three common cycles to which the stocks are assigned:
The easiest thing to remember is this rule: There always will be current-month options (the “front-month”), and there always will be options for the very next month. The only exceptions would be if a security is delisted.
One easy way to find out whether an option is available is to look at the options chain, which is available through your broker or on the finance pages at Yahoo (YHOO) and Google (GOOG). The options chain provides a list of all the months and prices which are available for a given security.
For Delta, the April and May expirations have only just become available, so there’s not much data on them yet for us to base our recommendation on. And we think the March date is much too close for comfort based on DAL’s past price performance.
Giving the stock a little more time to develop should pay off well, although we do not expect that you will have to hold the trade until June. It should pay off much sooner than that.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
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