Delta Air Lines, Inc. (NYSE:DAL) stock has had a choppy 12 month period of trading. It had a handful of +/- 15% moves during that time. While the one-year performance net result is lagging that of the 21%-plus iShares Dow Jones Transport. Avg. (ETF) (BATS:IYT) move, 12%-plus coming into the earnings for DAL is impressive.
Today, I want to add bullish exposure to DAL based on fundamentals. I see value and I want to add to profits now that the earnings event is in the rear view mirror.
Even after 12% and today’s earnings spike, fundamentally Delta Airlines Stock is still cheap. Its price-to-earnings ratio is barely a teenager so I am confident that owning the stock won’t be a giant financial debacle. Furthermore its price-to-book value is just over three. So I am confident that I will profit from owning shares in the long run.
Even though I believe that under the current macroeconomic conditions quality companies like this will be higher in 2018, I can’t trust this environment to last. So I am more sure of support than in upside price targets. So I will use DAL options instead of buying the stock outright.
I am conservative in nature and using options allows me to set a moat around my risk.
And then there is also the surprise risks that come out of nowhere. The airline industry is notorious for having headlines hit unexpectedly. We all still remember the debacle around the viral video from United Continental Holdings Inc (NYSE:UAL) where they dragged a passenger off a plane. Delta has had its own operational problems that affected thousands of flights. Those headlines have since died, but the threat is ever-present.
Technically, DAL stock is breaking out of an ascending wedge. Usually when bulls prevail in those they overshoot higher. This is especially true in uber-bullish stock markets like the one we are currently in.
Click to Enlarge However, we’ve been in all-time-high territory for a while and Wall Street is nervous about going this long without a correction. So one could hit us and that would affect all stocks regardless of their individual bullish scenarios. Luckily, my trade setups do not need a rally to profit. If one ensues then I profit faster and more importantly, if we get a swoon I have room for error.
The bottom line is that DAL is soaring on earnings and I want to cautiously bet bullish on their fundamentals. So, I will sell downside risk against unlikely bearish scenarios and let time do the work.
DAL Stock Trade Idea
The Trade: Sell the DAL Feb 23 $51 naked put and collect 45 cents to open. Here I have a 85% theoretical chance that I would retain maximum gains. But if the price falls below my strike then I own the shares and would suffer losses below $50.55.
Selling naked puts comes with big risk, especially for an airline stock. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the DAL Feb 23rd $52/$50 credit put spread, which would deliver over 12% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to 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.
Get my newsletter for free 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.