I have never been a big fan of airline stocks. It’s nothing personal, as I have watched or talked about the bankruptcies in the space over the decades. However, there is no denying the incredible multi-year run and returns the sector has provided.
Most of my trades in airline stocks were bearish in past years, but, this year, I have been trying to look at the bullish side of things. The problem, though, is that it has felt like a “crowded trade” because the suits-and-ties were banking on lower oil prices, a mild winter, overcapacity and continued up-charges.
A new study by the trade organization Airlines for America showed that the airlines are expected to carry 222 million passengers this summer, which would beat the record of 217.6 million passengers that flew in the summer of 2007.
Although I haven’t pulled the trigger on a trade in the sector specifically this year, this nugget of research put me in a bullish mood for airline stocks.
One of the easiest ways to track airline stocks is by following the Dow Jones US Airline Index. The chart below shows lower highs and lower lows being made following the peak in late January.
The three-month downtrend appears to have bottomed, and the recent trading range is challenging the 50- and 100-day moving averages. A close above 255 to 260 would be a very bullish signal that could lead to a test of 270 to 275 over the near term.
This was a good confirmation signal to look at some of the airline stocks and as a way to play bullish call options. My natural instinct was to first check for pocket aces, as I want to arm myself with the best possible hand.
American Airlines Group Inc (NASDAQ:AAL) shares are also in a mini-trading range, but they are currently below their 50- and 100-day moving averages.
Shares of AAL topped out at $56.20 in late January and nearly took this mark out in late March. A close above $50 to $50.25 would be a bullish signal to go long for a possible run at double nickels ($55) again and fresh 52-week highs.
The AAL Jun $52.50 calls look attractive, trading at last check at 58 cents, and open interest in these contracts is more than 36,000 contracts. This means that options traders are expecting a gravitation towards this level over the next month.
JBLU is also in a similar trading pattern and will be in blue-sky territory on a move above its 52-week high of $22.14.
Bullish bets were being made in the JBLU Jun $22 calls on Monday, and open interest is more than 8,000 contracts. The calls were priced at last check at 65 cents.
When trading options, I like to look for liquidity and tight bid/ask spreads, as it makes it much easier to get in and out of trades.
While there are plenty of candidates out there, I will likely sit these trades out, as I still need to do some additional homework on the airlines.
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