The once high-flying airline sector has found itself virtually grounded. Thanks to a toxic cocktail of rising oil prices and severe winter weather, the economics propelling stocks in this airspace have become extremely turbulent. That offers opportunity for option trading aficionados.
Over the past three months, the Guggenheim Airline ETF (NYSE: FAA) has seen a 10.3% decline, with much of that loss ramping up over the past two weeks. And the just-launched Direxion Airline Shares ETF (NYSE: FLYX), has fallen 6% since it began trading on Dec. 13.
The pain in the sector has been made even worse by the blizzard conditions throughout the Midwest and East Coast. The storms have caused an estimated 6,000 cancellations per day for the last several days. Political upheaval in Egypt has caused fear of a disruption in global oil supplies, and sent the price of a barrel of crude to over $90. Considering the biggest cost for airlines is fuel, those higher costs are going to hurt.
FAA ETF
But these sector negatives come after the industry as a whole has seen profit metrics improve. In fact, margins at big airlines are the highest they’ve been in at least a decade, with the eight largest U.S. airlines forecast to collectively earn more than $5 billion in 2011. Of course, that was the estimate before oil took off and the storms went wild.
For options traders, there are several ways to play the recent nosedive. If you prefer a little time to plan your trade, check out the March Puts, expiring March 19.
Options on FAA don’t have much liquidity, though the FAA Mar 36 Puts have the largest open interest. This out-of-the-money contract could be a good choice for bearish investors in the space.
As for individual airlines, United Continental Holdings (NYSE: UAL) is the big bird in the space, and there is quite a bit of liquidity in its options. With UAL trading around $25, the in- or at-the-money March Puts — the 24s, 25s and 26s — have seen some recent activity.
Southwest Airlines (NYSE: LUV) closed yesterday at $11.68 making the LUV Mar 11 Puts, LUV Mar 12 Puts and LUV Mar 13 Puts in- or at-the-money, and all are liquid.
Delta Air Lines (NYSE: DAL) closed yesterday at $11.57, so the DAL Mar 10 Puts, Mar 11 Puts and Mar 12 Puts have been active.
If the nosedive in airline stocks continues, these puts will likely fly high.
At the time of publication, Jim Woods held no positions in any of the stocks, funds or options mentioned in this article.
