This year has been turbulent at times, but Delta Air Lines, Inc. (NYSE:DAL) is now readying for a major liftoff in 2017. For bullish investors though, a protected DAL stock position using Delta options looks like a smarter way to hop on board. Let me explain.
As I wrote in back in September, pricing concerns, system outages, terrorism, Brexit and even the risk of rising fuel prices have all been used on one or more occasions during 2016 to keep Delta investors literally gunning for the emergency exits, rather than purchasing DAL stock.
Our DAL stock analysis also happened to be contrarian in its point of view.
At the article’s core, investors were urged to ignore the market’s bearish narrative on DAL stock and airline peers such as United Continental Holdings, Inc. (NYSE:UAL) and American Airlines Group Inc (NASDAQ:AAL).
Lo and behold, despite all the bearish overtures and dire forecasts, DAL stock has persevered and clawed its way back to flat on the year, excluding a dividend of 1.61%. For its part, the S&P 500 is up 11% without factoring in its shareholder payout.
The good news in all of this for DAL shareholders is Delta trades at a reasonable multiple compared to the S&P 500. Additionally, with the stock’s relative price weakness and corrective action of the past year — DAL stock has put itself in solid technical position to outperform going forward.
DAL Stock Weekly Chart
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Looking at the weekly chart of DAL stock we can see shares have essentially gone nowhere for almost two years — or in airline lingo, they have sat on the technical tarmac since January 2015 when shares hit an all-time-high of $51.06.
For bulls though, there’s even more to the story. Aside from nearly two years of flat returns and anticipating more normalized and positive price performance for DAL stock, shares have also corrected by a sizable 38% and established a first-stage weekly cup and handle base.
The bullish combination bodes well for Delta shareholders as we enter 2017 as it should lead to an important technical breakout to new all-time-highs.
Delta Stock Collar Strategy
Reviewing Delta stock’s options board, the DAL Feb $55/$45 collar delivers stockholders sufficient upside return and protects the position against larger, downside risks.
With shares at $50.75, this collar trades for $50.65 as the sold $55 call’s premium is 10 cents more than the price of the purchased $45 put used to protect the DAL stock position.
In entering the collar for $50.65 the trader is in position to achieve a maximum return of 8.57% for the two month holding period if DAL stock rallies to $55. That of course works out to a very nice annualized return.
What’s more, the enviable, but capped profit of the DAL collar can also be adjusted. If shares move higher, the trader roll his or her Delta options up and out. This means riding a longer bullish trend in DAL stock to greater gains is always possible with a collar. Profits for this strategy however, will typically track below an outright long stock position.
Bottom line, with a nice profit profile and the opportunity to adjust if DAL stock begins to really take off coupled with having concrete downside protection in place, makes this DAL collar a smarter way to hop on board Delta as a shareholder.
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.
