Do Higher Oil Prices Spell Doom for Airline Stocks Like LUV?

Oil jump may cause a breakdown in LUV stock


Airline stocks have enjoyed a nice little boost in recent months due to crashing oil prices. The latest rally from the likes of Southwest Airlines Co (NYSE:LUV) and Delta Air Lines, Inc. (NYSE:DAL) has capped off historic runs for both stocks.

southwest-airlines-luv-stock-logo-185-NEWWith oil prices making a comeback, now is an appropriate time to take a renewed look at airline stocks to determine what effect rising oil prices may have on these high-fliers.

To get an idea of how far LUV stock has come, consider the following monthly chart, which is nothing short of glorious. Last month’s down candle was the first seen in 17 months.

Southwest shareholders have been coddled for so long they’ve perhaps forgotten what a down move looked like.

Source: OptionsAnalytix

The relationship between oil prices and airline stocks has been in a constant state of flux — sometimes they move together, sometimes they don’t.

Recently, the correlation between the two has been consistently negative, suggesting falling oil prices have benefited the airline sector. To illustrate, consider the following chart showing the Dow Jones U.S. Airline Index with West Texas Intermediate crude oil (gray area chart). Since mid-October the correlation study has rested soundly in negative territory.

Source: StockCharts

Should the inverse relationship persist, you can bet a continued rise in oil will induce some turbulence for LUV and other airlines. A brief survey of the daily chart of LUV stock reveals a pivotal support level at $42.25. Today’s gap lower was bought aggressively at this level, showing bulls aren’t giving up without a fight.

If you’re looking to go bearish on LUV, wait for a break of this zone before pulling the trigger.

LUV daily
Source: OptionsAnalytix

LUV Long Put Play

With implied volatility at lower levels LUV options are relatively cheap right now. Should support fail, buy the Jun $43 put option currently trading for $2.50.

Your maximum risk is limited to the initial debit paid and will be lost if LUV sits above $43 at June expiration. The maximum reward is unlimited up until LUV falls to zero. The next major support is at $38 so I’d consider taking profits around there.

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

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