After a turbulent start to 2016, Southwest Airlines Co (NYSE:LUV) stock is on the verge of returning to positive territory for the year. Only one major technical hurdle lies in LUV stock’s way … and the company’s second-quarter earnings report.
What’s more, it appears that the potential for positive results on either of these fronts has spooked short sellers.
With bearish baggage jumping ship, LUV stock bulls and options traders should take a closer look.
Diving into the numbers, Wall Street is anticipating Southwest Air earnings of $1.22 per share, up 17.5% year over year. Revenue, however, is expected to slip 5.8% to $5.41 billion.
At first glance, the sentiment front appears rather tame. For instance, EarningsWhisper.com reports the second-quarter whisper number is flat with the consensus estimate at $1.22 per share.
However, longer-term expectations are much higher. Specifically, Thomson/First-Call reports that eight of the 11 analysts following Southwest Air rating it a “buy” or better. The 12-month price target rests at $52.54.
Elsewhere, something has short sellers spooked. During the most recent reporting period, the number of LUV shares sold short plummeted 32% to 10.4 million shares. Regardless of what’s driving the activity — expectations for LUV’s earnings or a potential technical breakout — a continuation of this trend could drive the stock higher.
Click to Enlarge Turning toward the options pits, we find a mix between bullish sentiment among speculators focused on Southwest Air’s earnings and bearish expectations among longer-term traders. Specifically, LUV’s July/August put/call open interest ratio arrives at an extremely bearish reading of 2.21, with puts more than doubling calls among options set to expire before the end of August.
This ratio dips sharply to 0.77 in the weekly July 22 series — i.e., those options most directly influenced by this week’s earnings.
Overall, weekly July 22 series implieds are pricing in a potential post-earnings move of about 4.3% for LUV stock. This places the upper bound at $45.02, while the lower bound lies at $41.30 from Monday’s close. Technically, LUV is staring up at key short-term resistance at $45, with longer-term resistance near $47 and LUV’s 2016 highs.
2 Trades for LUV Stock
Call Spread: Those traders looking to bet bullish on LUV stock might want to consider an August $44/$45 bull call spread. At last check, this spread was offered at 37 cents, or $37 per pair of contracts. Breakeven lies at $44.37, while a maximum profit of 63 cents, or $63 per pair of contracts, is possible if LUV stock closes at or above $45 when August options expire.
Put Sell: With the potential for stiff overhead resistance at $45, and the general overall market malaise, more cautious traders might want to consider a weekly July 22 series $40 put sell position. At last check, this put was bid at 30 cents, or $30 per contract.
As long as LUV trades above $40 through weekly July 22 expiration (this Friday), traders will keep the premium received. If LUV trades below $40 ahead of expiration, however, traders could be assigned 100 shares for every put sold at a cost of $40 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
