American Airlines Group (AAL) is poised to fly higher on a technical breakout stock combined with solid fundamentals and a meaningful move lower in the price of crude oil.
The chart below shows that American Airlines stock has broken through major overhead resistance at $44, along with the 50-day moving average at $43.10 as well as the 200-day moving average at $44.35. These previous levels of resistance have now switched and become major levels of support.
Fuel accounts for 21% of American Airlines overall operating expenses, so lower oil prices are also a major benefit to AAL, as jet fuel prices are highly correlated to the price of oil. With oil futures breaking significantly below major support at $40 this morning, this should provide a further tailwind for lift off in AAL stock.
Monday’s Vital Data: AAPL, KMI, FB
American Airlines reported record profits during its latest earnings report, with a record $1.9 billion quarterly profit. AAL also has been aggressively buying back shares, which will provide additional support to AAL stock price. The company recently authorized a fresh $2 billion stock repurchase program, which follows on the heels of the recently completed $1.56 billion share buyback.
With AAL stock looking bullish on a technical and fundamental front, along with the added benefit of lower oil prices, I expect AAL stock price to make a run to the recent highs at the $47 level. This was the price of AAL stock following their latest earnings announcement, which beat on both the top and bottom line. It would also fill in the gap on a technical basis, with $47 being the next major resistance area.
To position for the move higher in AAL stock, I would go long a January call spread, buying the AAL Jan $45 calls and selling the AAL Jan $47 calls for an $1.02 net debit. The maximum loss on the trade is the initial net debit of $102 per contract, while the maximum gain is $98 per spread.
The return on risk is 96%, with the maximum loss realized if AAL stock is below $45 at January expiration and the maximum gain achieved if AAL stock is above $47 on that date. The spread is 17 deltas net long at inception, with the short strike price structured at the $47 resistance level.
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.
