It is hard to ignore the rise of the Transports. The iShares Dow Jones Transport. Avg. (ETF) (NYSEARCA:IYT) is up more than 14% in six months. Clearly, the sector is in favor on Wall Street. JetBlue Airways Corporation (NASDAQ:JBLU) stock is not so lucky, down 9% for the same period. But it has had its ups and downs, so this swoon shall also pass, and therein lies my opportunity.
Today I want to go long JBLU stock even though I worry a little about the trader reaction to the upcoming earnings. Furthermore, technically the stock could be vulnerable to further downside. It is bumping along a neckline that, if lost, could bring about a retest of $20 per share. Although this is not a forecast, it is a possibility that I have to consider.
So, instead of buying the shares outright and risking $21 with absolutely no room for error, I will use JBLU options. There I can eliminate the need to be surgical with my trade timing.
Instead of betting on an upside move, I am more confident betting on support especially where I see value.
The JBLU stock stock is not languishing alone. United Continental Holdings Inc (NYSE:UAL) is down 12% in six months. Delta Air Lines, Inc. (NYSE:DAL) and American Airlines Group Inc (NASDAQ:AAL) are down 1%. So for some reason airlines are out of favor relative to the transports.
Click to Enlarge This, however, doesn’t change the fact that JBLU is cheap. With a price-to-earnings ratio of 11, I have confidence that I can own the shares, especially if at a discount from here, and profit from it. This is integral to my style of trading and today’s set up.
Analysts agree with me since currently JetBlue stock is trading 11% below the average price target on Wall Street. Still I won’t bet on the hopium of higher prices. I will confidently bet that support will hold and even if it doesn’t I will own the shares at a 14% discount from here. For that, I get paid a premium today to open my trade.
The B.T.F.D. meme is alive and well in this uber-bullish market. And I want to take advantage of this dip in a quality company like JBLU.
JBLU Stock Trade Idea
The Trade: Sell JBLU Mar $18 put. This is a bullish trade for which I collect 30 cents to open. I have an 85% certitude that I will retain maximum gains. But if price falls below my strike then I own shares. I would then need to manage off my break-even point of $17.70.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell JBLU Mar $18/$17 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 JBLU 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.