Flying High With Southwest Earnings: 2 Trades for LUV Stock

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High-flying Southwest Airlines (LUV) has hit some turbulence in 2015, but low oil prices and fleet restructuring have gone a long way toward bolstering support for LUV stock.

Wall Street will get a closer look at Southwest earnings this Thursday, when the company glides into the earnings confessional to release its third-quarter figures.

For the record, Wall Street is anticipating Southwest earnings of 92 cents per share, up an impressive 67% from year-ago earnings of just 55 cents per share. Revenue, meanwhile, is seen rising 6.5% year-over-year to $5.11 billion.  

Historically, Southwest earnings have topped the consensus estimate in each of the past eight quarters, although the company only posted a slim 1-cent beat in the previous quarter.

Still, with such a strong fundamental backdrop, it should come as no surprise that EarningsWhisper.com reports a third-quarter whisper number of 94 cents per share for Southwest earnings — two cents better than the Street.  

Bullish sentiment is thick within the brokerage community, with 13 of the 17 analysts following LUV stock rating it a “buy” or better, and a 12-month price target of $51 per share that represents roughly 20% upside.

Options traders are also keen on LUV stock’s prospects, especially in regard to Southwest earnings. Currently, the October/November put/call open interest ratio for LUV stock comes in at an extremely bullish reading of 0.14, with calls outnumbering puts by a factor of more than seven-to-one. This ratio dips considerably when we look at just the weekly October 23 series, but at 0.41, calls are still more than twice as popular as puts ahead of Southwest earnings.

10-20-2015 LUV
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Overall, weekly October 23 series implieds are pricing in a potential post-earnings move of about 4.6% for LUV stock. This places the upper bound at $43.40, while the lower bound lies at $39.60.

From a short-term perspective, LUV has run into resistance near $42, but the stock appears to be establishing a foothold north of former round-number resistance at $40.  

The $40 region is also home to LUV’s 10-day, 50-day, and 200-day moving averages — meaning that technical traders could add to a potential post-earnings rally (or sell off) depending on the stock’s reaction.

In short, implieds may be underestimating LUV’s reaction potential, resulting in cheap option premiums.

2 Trades for LUV Stock

Call Spread: Traders looking to jump on the bullish bandwagon for LUV stock might want to consider a November $42/$43 bull call spread. At last check, this spread was offered at 45 cents, or $45 per pair of contracts. Breakeven lies at $42.45, while a maximum profit of 55 cents, or $55 per pair of contracts, is possible if LUV stock closes at or above $43 when November options expire.

Put Sell: With the potential for stiff overhead resistance at $42, and the general overall market malaise, more cautious traders might want to consider a weekly October 23 series $37 put sell position. At last check, this put was bid at 13 cents, or $13 per contract. As long as LUV trades above $37 through weekly October 23 expiration (i.e. this Friday), traders will keep the premium received. If LUV trades below $37 ahead of expiration, however, traders could be assigned 100 shares for every put sold at a cost of $37 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/flying-high-southwest-earnings-2-trades-luv-stock/.

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