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Margin pressure in the airline sector has made the last few months tough. However, there are a few catalysts for potential upside in the short term. We’re seeing a good opportunity to take advantage with a bullish trade on Southwest Airlines Co (LUV).
Retreat by Delta Air Lines, Inc. (DAL) is good for the industry, while support at $41 looks strong for LUV. Monday’s confirmed bullish “harami” is a good momentum signal despite the market’s volatility.
We also see this as an indirect trade on lower oil prices. The current energy rally is being driven by non-fundamental externalities. That isn’t uncommon, but it tends to be very unstable. All else being equal, if oil prices fall, we would expect that to be a very good thing for airline margins. We think LUV and SkyWest, Inc. (SKYW) are best positioned for this kind of trend.
‘Buy to open’ the LUV June 42 Calls (LUV160617C00042000) for a maximum price of $1.70.
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