Delta Air Lines, Inc. (DAL) shares have been flying high as of late. And with earnings on the radar Wednesday morning, now’s a good time to take a look at DAL stock to see how much higher it has to go.
Let’s take a look at Delta’s earnings history, its chart and a trading opportunity ahead of its upcoming report.
Delta Earnings History
In front of Delta’s third-quarter earnings release, set to come before Wednesday’s opening bell, analysts are forecasting earnings of $1.72 per share. The profit estimate compares to the year-ago period’s $1.20, and last quarter’s $1.27. Over the past year, Delta earnings have matched in three of four reports, and topped the Street’s bottom-line consensus once by a margin of 8.06% in Q4 2014.
On the revenue side, analysts are calling for $11.1 billion in sales for Delta stock’s Q3 — just slightly lower on a year-over-year basis. Sales “surprises” (or a lack thereof) are eerily similar to earnings, with three matches in four reports, as well as an 8% beat back in Q4.
Delta stockholders have been generally agreeable following these reports. Close-to-close investor reaction in DAL has resulted in uniform but mixed gains of 0.76%, 2.59%, 7.27% and 2.9% over the past year. Longer-term, over the last few years DAL has produced bullish post-earnings moves 69% of the time.
Delta Stock Chart Analysis
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First, the good news. Delta stock has been demonstrating relative strength since the broader market’s “mini flash crash” back on Aug. 24.
The strong bid also has resulted in shares of Delta stock trading above all key moving averages and signaled a golden cross. This technical formation occurs when the 50-day and 200-day simple moving averages move into proper alignment, with the former crossing above the latter.
Now, for a technical warning.
Delta stock has shown a knack for frustrating bears and bulls with its quick-to-change ability to shift back and forth between downtrends and uptrends within its year-long, mostly lateral base formation.
However, DAL does look technically poised to take off — a lengthy base and a firming price chart should combine well with Delta’s record of consistent investor reactions following earnings.
Delta Stock Options Pricing
In mid-morning trade Monday, options traders were pricing in a 68% chance that Delta stock will remain within a range of $45.50 and $50.50 through Friday, with DAL trading near $48 a share.
The math behind this calculation uses the 49% implieds of the at-the-money DAL Oct $48 straddle. The October contract, which is about to expire in four days, represents the closest trading vehicle in the options market to a pure earnings play and tells us what traders collectively expect from DAL stock following earnings.
The expected dollar move up or down works out to about 5% by Friday’s close. The figure is larger than three of the past four immediate reactions in Delta stock. But the pricing by traders isn’t as expensive as one might think.
Delta stock over the past year has shown gains of 2.27%, 7.30%, 7.29% and 15.18% during the seven-day period following earnings. Those gains are substantially better than DAL’s one-session tallies.
Delta Stock Bull Call Spread
Considering the bulls’ edge, Delta’s post-earnings pricing and the desire for protection in case DAL fails to meet expectations, we like the weekly Oct. 23 $48/$49.5 bull call spread.
With Delta stock trading around $48, this spread is priced at 65 cents, putting breakeven at $48.65 at expiration. The trade can profit by $1.35 should shares finish above $49.50, giving you a return in excess of 200%.
This Weeklys vertical requires just 3% of upside movement in Delta stock to realize its maximum profit. That’s definitely nice given what has been discussed.
Further, this call spread maintains a full eight trading days after the earnings event. This means there’s enough time on the calendar in which to better capitalize on DAL stock’s seven-day reaction record of the past year, should history repeat itself.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
