Several airline stocks that look interesting based on their charts, but there is one that particularly looks interesting to me as an options trader. That stock is United Continental Holdings Inc (NYSE:UAL).
Maybe I’m biased on UAL stock because I just booked a flight from Chicago to Miami on United. Or maybe it’s just that airlines — including American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc. (NYSE:DAL) — have made double-digit gains since the beginning of November. There are several possible reasons behind this, including President Donald Trump promising to upgrade the air traffic control system and recent interest in the airlines from Warren Buffett.
For those reasons and more, I like United stock, particularly via the trade idea below.
The Trade Setup
The rationale: Taking a look at the chart below, United shares moved higher throughout the month of November before settling in and trading between about $70 and $76 since the beginning of December.
In addition, UAL stock has made several attempts to move through the $76 level, including several times this week. So far it has not been able to do so.
I will be keeping an eye out for it in case it does for a bullish directional trade.
How to Trade UAL Stock Here
The trade: Sell the UAL Mar $68/$70 put credit spread (selling the Mar $70 put and buying the $68 put) for 30 cents or better.
The strategy: The maximum potential profit for this trade is 30 cents if UAL stock is trading at or above $70 at Mar expiration. The maximum loss is $1.70 ($2 – $0.30) or whatever credit was received for the spread if UAL stock is trading at or below $70 at Mar expiration. Breakeven is $69.70 at expiration based on a 30-cent credit.
With all out-of-the-money (OTM) credit spreads like this trade, the risk is greater than the reward. The reason for this is because of the likelihood of profit. Essentially this trade has three out of four ways to profit. The stock can move higher, trade sideways or just stay above the breakeven point at expiration.
For this trade idea to be successful and finish at max profit, the stock needs to stay above the $70 level by March monthly expiration. The low end of the channel needs to act as support like it has done since early December.
Adding to the potential support for this trade, the 50-day simple moving average has moved up to the $74 area, and the stock is currently trading above that level.
What also makes this trade idea intriguing from an options perspective is the current implied volatility of the options. The current IV is above the historical volatility (HV) levels which may indicate the current premiums may be a little inflated.
This is perfect for a credit trade on UAL stock.
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at john@markettaker.com. As of this writing, he did not own a position in any of the aforementioned securities.
