Wednesday was another flat day on Wall Street, with the major market indices hovering close to breakeven. However, the session wasn’t without its fair share of excitement, as airline stocks were pummeled on growth concerns. Options traders held onto their recent preference for calls, even among airline stocks, with the CBOE put/call volume ratio dipping to 0.58. The 10-day moving average fell to its lowest level since early March at 0.6.
On the options front, airline stocks were inundated with heavy volume after Southwest Airlines Co (NYSE:LUV) warned that passenger unit revenue would drop this quarter. The report sent shockwaves throughout the airline industry, with Delta Air Lines, Inc. (NYSE:DAL), American Airlines Group Inc (NASDAQ:AAL), and United Continental Holdings Inc (NYSE:UAL) storming Wednesday’s top 10 most active options listing.
Outside the airline sector, Yahoo! Inc. (NASDAQ:YHOO) recovered from a tax scare on Tuesday, as the company reassured investors that changes at the IRS would not result in taxes on the the Alibaba Group Holding Ltd (NYSE:BABA) spinoff.
Now, let’s look deeper into the heavy options activity in YHOO, LUV and DAL.
Southwest Airlines Co (LUV)
Southwest Airlines created considerable turbulence in the airline sector after the company warned that it expected passenger revenue per available seat mile (PRASM) to fall 3% in the second quarter. Poor year-over-year comparisons make up for part of the larger-than-expected decline, but many analysts see so-called capacity guidance as a potential industry-wide issue, especially with Southwest controlling 17% of the domestic airline market.
While AAL, UAL and DAL all saw record short-term options volume on the day, only LUV stock was targeted by unusual put volume. Of the 104,765 contracts trading on LUV, 65% crossed the tape at put contracts. Looking at the June series for LUV, peak put open interest resides at the now in-the-money $41 strike, totaling 7,003 contracts, with another 6,662 contracts at the near-the-money $37 put strike.
LUV stock is seeing a bit of a bounce in premarket trading, with the stock up 0.7% at last check.
Delta Air Lines, Inc. (DAL)
DAL stock was smacked lower for the second session in a row on Wednesday, as fallout from the Southwest warning spilled over into the rest of the airline sector. Most troubling for DAL is that the stock was soundly rejected at resistance near $48 — an area DAL has not bested since February. Furthermore, the shares also breached their 200-day moving average in the process, creating a potential “sell” signal for technical traders.
Unlike LUV stock options activity, traders sought out DAL calls on Wednesday. On the day, DAL saw 222,257 contracts cross the tape, with calls making up 66% of the day’s volume. Currently, June out-of-the-money calls are most popular with DAL traders, but whether this is due to hedging activity or genuine bullish bets has yet to be seen. Peak June call OI rests at the $52.50 strike, totaling 51,320 contracts, while the $47 strike arrives at a distance second with 30,042 contracts open.
DAL stock is up nearly 1% in pre-market action, as the shares look to reclaim their 200-day trendline.
Yahoo! Inc. (YHOO)
We’re all familiar with IRS scares of one kind or another, but Yahoo! stockholders were hit with a potentially nasty scare on Monday. Specifically, the IRS announced that it was considering changes to how it taxes spinoffs — a move that could have negatively impacted Yahoo!’s coming divestment of its BABA holdings. On Wednesday, Yahoo! assured stockholders that the BABA spinoff would not be taxed, easing fears and allowing for a rebound in YHOO stock.
Relieved options traders pushed a record number of short-term YHOO stock options contracts across the tape on Wednesday, with more than 314,000 contracts changing hands. Additionally, 61% of this volume traded as call contracts, with traders heavily focused on the June $45 strike. As of the close last night, there were 57,501 call contracts and 50,491 put contracts open at the June $45 strike, creating the potential for a showdown at this level going forward.
After rising more than 4.4% on Wednesday, YHOO stock is up about 0.72% in premarket activity.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
