After a sharp upside breakout, shares of American Airlines Group Inc (NASDAQ:AAL) have descended rapidly. The previous high flier has seen a nearly 13% drop since making a intraday high of $59.08 on Jan. 16. Given the solid fundamental backdrop and much improved technical picture, I expect AAL to come out of the recent tailspin and begin to regain some altitude over the coming weeks.
AAL reported earnings on Jan. 25 that beat on both the top and bottom line. EPS came in at 95 cents, beating estimates of 92 cents. Revenues also topped forecasts at $10.6 billion compared to expectations of $10.58 billion.
More importantly, guidance for 2018 was raised to a range $5.50 to $5.60 per share versus previous guidance of $5.32. American Airlines stock, however, dropped sharply following the earnings report. Now that AAL has fallen while earnings and guidance have increased, the forward price-to-earnings multiple of 9.55 is looking much more attractive than just at few weeks ago when it was at 11.
In my previous post on airline stocks (and AAL) from January 12, I thought that the breakout on American Airlines had gotten overdone with a move back to the $54 area likely. This bearish stance proved to be the case, with AAL closing at $53.07 on Friday.
The sharp drop in price has also tempered my previous bearish opinion, because price does matter. Shares are now no longer overbought-and fast approaching oversold-on a 9 day RSI basis while major support looms lower at the $52 level.
Implied volatility (IV) is still at the 50th percentile even following earnings, so option prices are still comparatively rich. This means option selling strategies are still viable. So to position for American Airlines stock to begin to consolidate and hold support, a bullish put credit spread makes sense.
AAL Stock Trade Idea
Buy AAL Feb $49 puts and sell the AAL Feb $51 puts for a 40-cent net credit
Maximum gain on the trade is $40 per spread with maximum risk of $160 per spread. Return on risk is 25%. The short $51 strike is positioned below the $52 support area and provides a nearly 4% downside cushion to the $53.06 closing price of AAL.
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 timbiggam@gmail.com
