While the headlines flying out of the White House are causing havoc in the stock market, United Continental Holdings Inc (NYSE:UAL) staff just created their own nasty headline that is likely to impact its stock for the near-term.
Last night, we learned of the tragic story of a dog that died on board a UAL flight because of improper handling by the crew. This is a sad and totally avoidable incident.
Shocking headlines are chronic with airlines. They always find new ways to create their own drama. We all remember the video of a passenger being dragged off a plane. And just when we think we are done, out comes another one that causes jaws to drop even wider.
As a life-long dog owner, my thoughts go out to the family. But this doesn’t change the fact that UAL stock continues to perform according to plan — and therein lies my opportunity to reload a winning trade. I bet that this headline will eventually fade and support for United Airlines stock will hold through 2018.
This is a bullish stock market so dips overall are long entry opportunities. Here I structured my trade so I can profit even without a rally. I merely need UAL to hold support so I can retain maximum gains. If a rally ensues my profits will come faster.
Fundamentally, UAL is priced in line with its major competitors like American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc. (NYSE:DAL). And overall all three are priced with a low price-to-earnings ratio around 11. Furthermore, with United’s Price to Book ratio just over 2, I am confident that owning UAL shares at a discount will not be a major disaster.
Most Wall Street experts rate the stock as a hold so there’s no help from them. Current stock price is near the lows of their price ranges. Technically, the shares have lagged its competition. In the past 12 months, UAL is flat while it’s competition is up at least 15% or more so there could be a catch up rally and its future.
Click to Enlarge The zone around $68 per share has been pivotal for the past 5 years, so it should provide decent support for UAL on dips. These are areas where bulls and bears fight it out hard, thereby creating stand stills. Just above $61 there’s a similar zone only for a much wider range.
So for the next few months I am confident that there’s plenty of support below current price against which I can sell risk on dips.
UAL Stock Charts
The Bet: Sell the UAL Sep $55 put for $1.25. Here I have a 85% theoretical chance of success. If the price falls below that level then I would suffer losses below $53.75.
Selling naked puts is daunting, especially near all-time-high stock markets especially when the headlines are flying fast and furious. Those who want to mitigate that risk can sell spreads instead.
The Alternate Bet: Sell the UAL Sep $55/$50 credit put spread where my risk is limited. If the spread wins would deliver 15% in yield.
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.
