While the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up 14% year-to-date, United Continental Holdings Inc (NYSE:UAL) is down over 11%. This looks depressing for those who are long the stock but it’s not. UAL is up 27% in 12 months which is more than the SPY. It simply had a bad summer.
UAL reported earnings yesterday and the reaction is bad. Traders initially spiked it but now it’s down 3% in after hour trading. Now that the event is gone, the stock left to continue trading the patterns already in progress. This is music to my ears as a premium seller.
Today I want to reload with a bullish trade that I’ve done already a few times this year. I will again use UAL options to generate income out of thin air. When Wall Street fears a worthy stock, I sell puts and profit from their disinterest. All I need is for proven support to keep working and I profit. Time will do the heavy lifting.
Fundamentally, UAL stock is the cheapest of the major airlines. Its price-to-earnings ratio is 25% cheaper than either Delta Air Lines, Inc. (NYSE:DAL) or American Airlines Group Inc (NASDAQ:AAL). The UAL price-to-book is less than half too. So if I were to own either, UAL would be the better deal. This discrepancy is even more pronounced relative to Southwest Airlines Co (NYSE:LUV).
Technically, there is upside potential for the UAL stock if they can break through recent resistance. Then they could retest $72 per share. But this dip to $65 changes things and I look to $64 per share as first line of defense. Below that, $60 per share has been in contention since 2014 so I would expect even stronger support there.
Sentiment and opinions are important to future price action. Wall Street is more than muted with their expectations for UAL. The analysts are on hold and the stock is trading 12% below the average price target.
Click to Enlarge Furthermore, it is trading $40 below the high price target mark and only $5 to the low. So they are either completely wrong or just biding time until it grows into their expectations.
And therein lies my opportunity. But I won’t be chasing that upside potential. Instead I will sell risk below proven support levels. If they continue to be support, then time will do the rest for me. The premium I sold will degrade and die worthless in my favor. I then achieve maximum gains.
UAL Stock Trade Idea
The Trade: Sell the UAL Jan $55 put for $1. This is a bullish trade which has an 85% theoretical chance of success. Otherwise I will accrue losses below $54.
Selling naked puts carries big risk. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the UAL $55/$52.50 credit put spread which would yield 18% on risk with about the same odds of winning. In either case I don’t need a rally to profit. In fact, UAL stock can fall 15% and I can still win.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing 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 as @racernic on twitter and stocktwits.