LUV: Southwest Airlines Soars After Earnings

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Southwest Airlines Co (NYSE:LUV) is soaring this morning on the heels of better-than-expected earnings. Its fourth-quarter earnings per share of 59 cents was enough to send the airline stock 7% higher to yet another new all-time high near $45 a share.

southwest-airlines-luv-stock-logo-185-NEWAirline stocks have been all the rage of late. Today’s launch is another in a long line of reasons for traders to consider the space for trade ideas.

After ascending 125% last year, LUV entered a much-needed holding pattern, circling $40 a share. This allowed the airliner to digest the impressive gains of 2014 while awaiting a new catalyst to take it higher.

This morning’s earnings surprise provided just that.

With the technicals of LUV stock pointing soundly higher, let’s turn to the options market to see if there are any trades to be had.

LUV Stock Options Analysis

LUV options offer a plentiful array of strike prices from which to choose. While most similarly priced stocks offer strike prices in $1 increments, LUV offers them in 50-cent increments, providing ample flexibility in structuring trades. The bid/ask spreads are narrow enough and trading volume — particularly today — high enough to provide a liquid market.

LUV stock
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Source: MachTrader

In typical post-earnings fashion, the implied volatility of LUV options has fallen today as the uncertainty surrounding earnings now sits in the rearview mirror. With an implied volatility (IV) rank of 45%, it’s tough to make the case that options are overly cheap or expensive.

As such, traders should rely more on their directional bias and preference for probability of profit in structuring an option play.

Traders willing to bet today’s breakout in LUV is the real deal could sell the Feb $42.50/$37.50 put spread for 65 cents or better. Provided LUV stock remains above the prior resistance zone near $42.50, the put spread will expire worthless, allowing you to pocket the maximum reward of 65 cents. That’s a return on investment of roughly 15% over the next month.

The maximum loss is limited to the distance between strikes minus the net credit, or $4.35, and will be incurred if LUV falls below $37.50. To limit the loss, I suggest exiting if the stock breaks below its 50-day moving average near $40.60.

At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/luv-stock-southwest-airlines-soaring-after-earnings-options/.

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