Go Long Delta Air Lines, Inc. (DAL) Stock While It Nosedives

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The airline stocks have had a terrible time of late. Delta Air Lines, Inc. (NYSE:DAL) is down 15% just since July. Luckily this came after its 25% rally that started in April, and after an even bigger DAL stock rally in August 2016.

Delta Air Lines, Inc. (NYSE:DAL)
Source: via Delta

This leaves DAL stock still up over 25% for the past 12 months. Today, I want to trade the price action of DAL stock not its valuation. This doesn’t mean that I get to arbitrarily place my bets. I will use the fundamentals to carefully situate my risk for best odds of success.

Even after an incredible rally, fundamentally the airline stocks in general are still cheap. DAL for example has a price-earnings ratio under 10 and it pays a dividend. So from that perspective, owning the shares at a discount from here is not likely to be a mistake. This point is pivotal to my trade.

Even though I think that DAL is cheap here, I don’t want to risk any money out of pocket to bet on a rally. I don’t trust the bulls to reach for higher prices as much as I trust the proven support levels below.


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We all know what happens when we try to catch to proverbial falling knife too soon, so I will use options to bet bullish on Delta stock. To do that I must be willing to own the shares where I place my risk.

The industry in general has considerable improved their operations. But still there are other risks to consider. For example the viral video from United Continental Holdings Inc (NYSE:UAL) where they dragged a passenger off their plane. Or Delta’s own recent operational problems that affected several thousand flights. Luckily, those headlines have since abated.

Technically, it’s not ideal to go long a stock that is falling with seemingly no end in sight. But that’s when the premiums are juiciest. I see two support zones around $46.5 and $45.50 per share, where bulls and bears are likely to fight it out. The fight should create some support for DAL. If they fail then the last line of defense is the April low of $43.90.

The Bet: Sell DAL stock Dec $41 put naked and collect $1 to open. I have an 85% theoretical odd of winning. But if price falls below my strike then I would accrue losses below $40.

Selling naked puts in a falling knife is daunting and some may want to mitigate the risk of this bet. For that I can sell a spread instead of naked puts.

The Alternate Bet: Sell DAL stock Dec $41/$40 bull put spread where I have the same chance of winning but with smaller risk size. If the spread wins, it will deliver 20% in yield.

Investing in the stock market doesn’t come with guaranteed results, so never risk more than you 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/2017/08/go-long-delta-air-lines-inc-dal-stock-while-it-nosedives/.

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