United Continental Holdings Inc (NYSE:UAL) has certainly been in the headlines lately, but for all the wrong reasons. The viral video of a United Airlines passenger being forcibly removed from the plane sent UAL stock skidding. The response from the CEO only added to the woes.
With United shares down nearly 10% from the recent all-time high, shares are starting to look attractive. The short-term turbulence will pass, leading to smooth sailing for United Airlines longer-term.
The largest shareholder in United Airlines is noted value investor Warren Buffett. His company, Berkshire Hathaway Inc. (NYSE:BRK.B), owns nearly 29 million shares of UAL, which equates to more than 9% of the shares outstanding. Most of these shares (roughly 24 million) were added last quarter.
Obviously, Mr. Buffett see something he likes in UAL stock.
United did sell off after its public relations nightmare, but it held the critical $70 level. The ability to hold such a key technical level in the face of bearish news bodes well for UAL. There is also solid secondary support at the $65 area.
United Continental’s earnings are due Monday, with expectations of 36 cents in EPS and $8.35 billion in revenues. The company reported March 2017 operational performance last Monday, which showed better metrics on revenue miles and total capacity. Load factor was fairly flat. United Airlines trades at a very reasonable price-to-earnings ratio of only 9.3 — a big discount to the current S&P 500 P/E of 24.
Click to Enlarge The recent bad PR, along with earnings, have elevated option prices. Implied volatility (IV) is now at the highest level in the past several months. This makes option selling strategies much more viable.
So with UAL stock looking good on both a technical and fundamental basis, and to follow along with Warren Buffett (usually not bad thing), a put sale makes intuitive sense.
How to Trade UAL Here
Sell the UAL June 65 puts for $2.
The put sale effectively sets you up to buy United stock at $63 per share ($65 strike less $2.00 premium). This equates to a 10% discount to the $69.93 closing price, and also positioned below the next level of support around the $65 level.
If UAL stock closes above $65 on June expiration, you pocket the $2.00 in premium, or $200 per put sold. If the stock closes below $65, you end buying 100 shares at $65 each for each put sold.
The short put can also be closed at any time prior to expiration.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
