Last week’s rally has airline stocks flying headlong into what’s bound to be some nasty turbulence. And that means shares of Delta Air Lines, Inc. (NYSE:DAL) could be ready for yet another nosedive. Traders needn’t worry, however. There’s a way to make DAL stock’s pain your gain with bearish options plays.
Ever since gapping lower amid massive distribution in late-January, Delta shares began a descent, which has yet to turn. The downtrend took shares below the 20-day moving average, the 50-day and even the 200-day for a spell. With a now uninterrupted series of lower pivot highs and lower pivot lows, the trend officially rests in a pair of mangy, claw-ridden bear paws. How long sellers remain in control remains to be seen, but for now, rallies like that seen last week, are suspect.
The lack of volume accompanying the rebound didn’t help matters much either. A low volume rebound suggests a lack of conviction by buyers and makes it easier for prices to roll over once sellers wrest back control.
Friday’s bearish reversal candle (a doji) paves the way for a new downswing to take root.
Another variable favoring a potential short trade here is the potential risk and reward. Since DAL sits close to overhead resistance in the form of a prior pivot and the 20-day moving average (both near $54), we can place a tight stop loss to minimize the damage if wrong.
And if the ailing airliner does suffer another plunge, then the potential gains are substantial in comparison.
A DAL Stock Bear Trade
Implied volatility has come in dramatically since the height of the panic two weeks ago. And that is making the purchase of options a lot cheaper. Let’s buy puts to bank on further weakness in Delta Airlines. Buy the April $52.50 puts for around $2.50. The risk is already capped at the initial cost, but if you want to minimize the damage further, then I suggest exiting if DAL rallies above resistance at $54.
The potential reward is virtually unlimited, but if DAL stock drops to $50, I suggest tightening your stop or ringing the register.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
