While stocks have been on an absolute bull run over the past few months, airline stocks have been on an even bigger move higher. Since making lows in mid November, shares of airline stocks have surged 16%, doubling the 8% gain in the S& P 500.
Certainly some of the gains are warranted, as tax benefits and improving business are decided benefits to future earnings. But the magnitude of the rally in the major airline names, combined with the fact that oil prices are at recent highs, should provide some headwinds to any further big gains in the airline stocks.
To be sure, I am not looking for any sort of serious decline in the following Big 3 of the airline industry, but instead just a tempering of the recent red-hot rally. Option implied volatility (IV) is still well above average, meaning option prices are still comparatively expensive. This makes option-selling strategies, such as bear call spreads, still very viable.
So without further ado, here are three airline stocks to consider shorting now.
Airline Stocks to Short: American Airlines Group Inc (AAL)
There is no disputing that the fundamentals have improved for American Airlines Group Inc (NASDAQ:AAL). Most metrics, outside of fuel costs, are on the upswing and the company did just up guidance slightly. The question now is how much further the rally can go, especially given the less-than-stellar technical backdrop.
American Airlines is getting decidedly overbought from a 14-day RSI perspective, with readings now exceeding 75. The only other time in the past year AAL was this exuberant proved to be a significant intermediate term high in the stock. Although shares did break out to the upside, I expect a retest of the old highs around the $54 level over the coming weeks.
Buy AAL Feb $65 calls and sell AAL Feb $60 calls for a 70-cent net credit.
Maximum gain on the trade is $70 per spread with maximum risk of $430 per spread. Return on risk is 16.27%. The short $60 strike price provides a 6.3% upside cushion to the $56.42 closing price of AAL stock.
Airline Stocks to Short: United Continental (UAL)
In a similar fashion to American Airlines, United Continental Holdings Inc (NYSE:UAL) has also seen an improving business environment and raised guidance. This helped fuel the recent strong rally in the underlying shares. But with fuel being such a large overall costs to the bottom line for airline stocks, one has to wonder how big a bite higher oil will take out of airline profits.
UAL stock is also getting extremely overbought, with RSI levels now well over 80. The only time readings were this high in the past 12 months coincided with a top in the stock. I look for United to consolidate over the coming few weeks.
Buy UAL Feb $85 calls and sell UAL Feb $82.50 calls for a 35 cents net credit.
Maximum gain in the trade is $35 per spread with maximum risk of $215 per spread. Return on risk is 16.27%. The short $82.50 strike price provides a 7.9% upside cushion to the $76.45 closing price of UAL stock.
Airline Stocks to Short: Delta (DAL)
Delta Air Lines, Inc. (NYSE:DAL) just reported earnings, beating on both the top and bottom line. EPS was 96 cents versus 88 cents expectations, while revenues beat by a much lesser amount at $10.25 billion versus $10.13 billion estimates. Guidance was upped, but the pesky fuel costs rose more than 20% in the quarter, a decided negative.
DAL is also fast approaching overbought levels as RSI nears 70. This has been a reliable indication of short-term tops in the stock, as seen in the chart. I look for Delta to level off around current levels post earnings.
Buy DAL Feb $65 calls and sell DAL Feb $62.50 calls for a 33 cents net credit.
Maximum gain in the trade is $33 per spread with maximum risk of $217 per spread. Return on risk is 15.2%. The short $62.50 strike price provides a 6.8% upside cushion to the $58.52 closing price of DAL stock.
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 [email protected]