Go Long United Continental Holdings Inc Stock on This Earnings Dip

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United Continental Holdings Inc (NYSE:UAL) reported earnings last night, but after an initial pop on a good scorecard, the stock is falling hard. While the quarter metrics were great, the rhetoric was about capacity expansion, and traders did not like that at all. This is code for higher costs and increased competition. This morning’s dip is widespread among all airline stocks.

Go Long United Continental Holdings Inc Stock on This Earnings Dip

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Luckily, UAL stock came into the report up 9% in the last 6 months, so long-term investors are not immediately decimated.

However, since we see the selling extend into other major airlines, there is reason to worry from a trading perspective.

So you’d think I am sharing a bearish trade today. On the contrary, today I am brave enough to catch this falling knife. This United Airlines report confirmed that their fundamentals are intact, and therein lies my opportunity.

To me it sounds like management realizes that they can improve their execution so they are taking steps towards that. So in the long run, the stock will be better for it. As it is with a price-to-earnings ratio barely over 10, UAL stock is cheap and getting cheaper. This is low in absolute terms and in line within its sector. So owning it at a further discount from here is not going to be a mistake.

Today my strategy is to generate income with no money out of pocket. So I am setting a bullish trade but without buying the shares and hoping they bounce so I can profit. I am a conservative investor so I want some room for error. I learned decades ago that calling tops and bottoms is a low probability occurrence. So I use fundamentals to set trades that have a high probability of success and a certain margin of error.


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On this dip and while most investors are running from the stock, I want to sell downside risk into their fears then let time do the work for me. If price stays above my support levels then the options expire in my favor and I would have instant profits.

Technically, UAL stock’s 10% dip erases the two-week spike we just had and brings it back into a three-year-old pivot zone. Those tend to be in contention. So the bulls are likely to fight over it, thereby creating support.

UAL Stock Trade Idea

The Trade: Sell the UAL Jun $57.50 naked put and collect $1.25 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 accrue losses below $56.25.

Selling naked puts is daunting, especially near all time high stock markets. Those who want to mitigate that risk can sell spreads instead.

The Alternate Trade: Sell the UAL Jun $57.50/$55 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade require a rally to profit.

Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I merely need UAL stock to hold its support for the next few months. I am betting that the value in the stock will prevent sellers from taking too far. It is important know that if they do, then I want to own the shares at a discount from here.

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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/go-long-united-continental-holdings-inc-ual-stock-on-this-earnings-dip/.

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