Transports recently hit an all-time high, but have since given back a chunk of their recent gains. That said, the iShares Dow Jones Transport. Avg. (ETF) (NYSEARCA:IYT) is up more than 20% over the past 12 months, so clearly, there’s still some strength in the industry. Impressive as this is, JetBlue Airways Corporation (NASDAQ:JBLU) is up even more, with JBLU stock up 33% over the past year, including 11% over the past six months.
Last week’s negative reactions to United Continental Holdings Inc (NYSE:UAL) and Delta Air Lines, Inc. (NYSE:DAL) earnings marred a nice June performance for the sector. It’s not that they delivered bad results, but over a binary event like earnings, what counts most are expectations.
Wall Street tends to price in their hopes ahead of time, so reactions on the news usually is relative to those expectations.
JetBlue has die-hard fans. I have family and friends who will always chose it for their travels regardless of cost. They perceive it as a notch above the rest. So it’s sort of a boutique airline, if I may borrow the expression.
Fundamentally, valuations of JBLU stock are in line with their competitors, from a margin and price-to-earnings perspective. In absolute terms, its P/E of 12 is cheap. I can safely say that unless the macro environment changes dramatically the valuation here is not bloated.
If JBLU is reasonably priced here, then I can be confident owning it 14% lower. This is the basis of my trade setup. I will sell downside risk against what others fear and let time make me money.
Click to Enlarge Technically, JBLU stock is in balance inside an ascending trend, even at these levels. It can fall 10% and still stay inside the regression channel, thereby leaving plenty of opportunity levels as defense. Prices are tightening, so there is an elevated chance that a move is coming.
The loss of $23 could bring a test of $22.50, which is the next pivotal point. Those can be sticky since neither bulls nor bears would be willing to give it up without a fight. Below $22.50, there are more such pivot points for added support.
Now, let’s look at the trade.
How to Trade JBLU Stock
The trade: Sell Jan 2018 $20 naked puts and collect 70 cents per contract to open. This is a bullish bet that price will stay above our strike so we can retain the whole premium for maximum profits. We only have an 80% theoretical chance of success, but I am fine with owning JetBlue shares at a 14% discount for the next few months. We would accrue losses below $19.30 per share.
Not all investors want to sell naked puts. For those, we can sell a spread instead where we can limit our maximum loss.
The alternate trade: Sell the Jan 2018 $20/$19 put spread for 20 cents, where we have the same odds of success but with much less money at risk. Yet if successful, the spread still delivers 25% in yield.
To temporarily guard against a negative reaction to JBLU earnings, we can buy a cheaper bearish bet through August.
The bearish hedge (optional): Buy the JBLU Aug $22 put for 30 cents or the Aug $22/$21 put spread for 15 cents, where we would gain if the reaction is a sharp drop, much like what happened to UAL and DAL of late.
There are no guarantees when investing in the stock market so I never bet more than I am willing to lose.
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.
