How to Trade Delta Air Lines, Inc. (DAL) Stock Before Earnings

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The charts of airline stocks look almost like bank stocks. Airlines have enjoyed a massive rally into 2017 from ultra-low levels. But even at their highest recent highs, the carriers’ valuations didn’t look too bad. For instance, Delta Air Lines, Inc. (NYSE:DAL) doesn’t exactly look like a screaming short when DAL stock is trading around 8 times trailing earnings.

How to Trade Delta Air Lines, Inc. (DAL) Stock Before Earnings

Source: via Delta

However, Delta earnings are coming up Wednesday before the bell, and I want to short the event. I’m not dissing the company’s fundamentals — I just want to make a bet based on short-term price action.

Fundamentally, the industry seems to have streamlined its operations, working on what appears to be good capacity levels. Just this morning, we learned of a United Continental Holdings Inc (NYSE:UAL) viral video where a flight was overbooked to the point that they literally had to drag a paying passenger off their plane.

Of course, Delta itself is having some operational problems on the back of massive storms that hit the company’s main hub in Atlanta. The airline has had to cancel several thousand flights since Wednesday, and the thought is that while much can be laid on the storms, DAL has flubbed parts of the recovery.

The opportunity I see here, however, is in the technicals of DAL stock. Prices are trying to hang on to $45 per share, but if it fails, sellers could be invited for a retest of $43.25.

DAL stock chart view 1
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As noted, I think airlines are operating lean and mean, so that gives us a floor against which we can sell downside risk to finance a near-term bearish bet. Or, in layman’s terms, we can bet bearishly against Delta for free.

How to Trade DAL Stock

The Trade: Buy the April $45/$44 debit put spread for 35 cents per contract. This is the maximum amount we can lose. We need Delta stock to fall below our spread for a chance to more than double our money. I chose a near-the-money spread so we only need to guess direction — not the size of the move — to profit. (The options markets are pricing in a move of plus or minus $1.60 on earnings this week.)

To mitigate our risk, we’ll eliminate the out-of-pocket expense by selling bullish premium below proven support levels.

The Bank: Sell the 26 May $40 put and collect 50 cents per contract. This is a bullish trade that has an 85% theoretical chance of expiring for maximum gains. As long as DAL stays above our sold strike, any premium we recover from the bought April put position would be profit.

Selling naked options is risky, so only do this if you’re willing and able to own DAL stock at that price. But again, Delta has a healthy P&L, so an entry point at a 10% discount from here sounds attractive to me.

Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/how-to-trade-delta-air-lines-inc-dal-stock-before-earnings/.

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