This Changes Nothing for United Continental Holdings Inc (UAL) Stock

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United Continental Holdings Inc (NYSE:UAL) was up 65%-plus in 12 months, which sounds like it’s the case of drunken traders chasing momentum. But not in this case — there is value, and I want to profit from it.

This Changes Nothing for United Continental Holdings Inc (UAL) Stock

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Even after this morning’s dip on earnings, UAL is still up 60%-plus in 12 months. So a small draw-down won’t change the general trend in this amazing rally.

No, I won’t join the party using the equity. Instead I prefer selling risk into UAL options. There I can better chose my levels to build a buffer and thereby eliminate the need to be surgical with my timing.

Runaway stocks often cause most traders to stay out waiting for better values. I say the value is already here and I won’t wait. By building room for error, I can then implement my thesis with more conviction.

Last night, United reported earnings and beat expectations yet the stock is down roughly 4% as of this writing. It even boosted some metrics, so it’s not like it delivered bad news now or in the future. This reinforces my theory that traders are fickle especially around earnings events. Their short-term reactions are purely binary and almost independent of fundamentals.

Speaking of which, UAL sports a trailing price-earnings ratio of under 12. This is a bargain by most standards and is on the low-end of the sector. I usually am not a fan of the airlines, but in this new normal where passengers pay extra fees for everything I am willing to give them another shot.

Sure, there is the unfortunate public incident where a passenger suffered physical harm after he was forcibly dragged from the plane, but those headlines have abated for now. UAL stock survived it and resumed higher since.


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Technically, I look to $76 per share as the first pivot level that could be support on this dip. This has been contention since last December.

It served as a roof then as support, so it needs to prove that it still is support. I look at support lines not as hard lines in the sand, but rather rubber bands. That is, as long as UAL stock is above $74.50, the bulls can still be in charge.

The potential downside if the bulls fail to prevail is a retest of $72/$70, which should be very strong support.

I say this because management just beat expectations and told us things are on track, so the macro that brought us to the highs remain. Hence, the overall bullish trend should also persist.

The Bet: Sell UAL Sept $67.50 naked put and collect $1.25 to open. This is a bullish trade that has an 85% theoretical odds of success. If price stays above my strike then I will retain the whole premium for maximum gains. Otherwise, I must own the shares and would lose money below $66.

Selling naked puts requires margin to secure it. To mitigate my risk there I could sell a spread instead. Then I would have a bull put spread which by definition is hedged within itself. The worst case scenario would not be greater than the spread.

The Alternate: Sell UAL stock Sept $67.50/$65 credit put spread where I have about the same odds of winning. Even though I have limited risk, the potential yield is still 17%. Compare this to risking $75 here and without any room for error expect a rally. I prefer having some wiggle room especially when equity markets in general are near highs.

Investing in stocks and options is risky business, so I never bet more than I can afford to lose.

Learn how to generate income from options 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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/this-changes-nothing-for-united-continental-holdings-inc-ual-stock/.

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