Show Some LUV for Southwest Airlines Co Earnings: 2 Trades for LUV Stock

Advertisement

After a rather bumpy start to the year, Southwest Airlines Co (LUV) appears to have finally righted itself and has been gaining altitude quickly in recent weeks.

Show Some LUV for Southwest Airlines Co Earnings: 2 Trades for LUV StockLUV stock has a chance to extend its gains this week, when Southwest Air releases its first-quarter earnings report Thursday morning. But expectations are high, sentiment is quite bullish and the stock is entering overbought territory, creating uncertainty for traders.

Diving into the numbers, Wall Street will be looking for a profit of 84 cents per share from Southwest Air — a gain of 27% year-over-year. Revenue, meanwhile, is seen rising 9% to $4.81 billion.

Despite the rosy numbers, recent gains in fuel prices could create difficult year-over-year comparisons, and competition among low-cost carriers could also impact Southwest Air’s bottom line.

The brokerage community doesn’t appear too concerned, however. EarningsWhisper.com reports a first-quarter whisper number of 85 cents per share for Southwest Air — a penny better than the Street. Furthermore, 12 of the 16 analysts following LUV stock rate it a buy or better, with a 12-month price target of $55 per share.

Options traders are also considerably bullish on the stock’s prospects. Currently, the April/May put/call open interest ratio for LUV stock comes in at a considerably bullish reading of 0.34, with calls nearly tripling puts among short-term speculators. This ratio dips when we look at just the weekly April 22 series, arriving at 0.31.

LUV stock
Click to Enlarge
Overall, weekly April 22 series implieds are pricing in a potential post-earnings move of about 4.4% for LUV stock. This places the upper bound at $49.08, while the lower bound lies at $44.92.

Technically, with resistance holding near $50 and support lying near $45, LUV’s post-earnings reaction could make or break the stock’s short-term outlook.

2 Trades for LUV Stock

Call Spread: Those traders looking to jump on the bullish bandwagon for LUV stock might want to consider a May $47.50/$48.50 bull call spread. At last check, this spread was offered at 45 cents, or $45 per pair of contracts. Breakeven lies at $47.95, while a maximum profit of 55 cents, or $55 per pair of contracts, is possible if LUV stock closes at or above $48.50 when May options expire.

Put Sell: With the potential for stiff overhead resistance at $50, and LUV stock trading near overbought territory, more cautious traders might want to consider a weekly April 22 series $42 put sell position. At last check, this put was bid at 13 cents, or $13 per contract.

As long as LUV trades above $42 through weekly April 22 expiration (i.e. this Friday), traders will keep the premium received. If LUV trades below $42 ahead of expiration, however, traders could be assigned 100 shares for every put sold at a cost of $42 per share.

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

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/southwest-airlines-earnings-luv-stock/.

©2024 InvestorPlace Media, LLC