The summer travel season is upon us, and Delta Air Lines, Inc. (NYSE:DAL) is poised to soar on increased demand.
The company’s solid reputation is one of the few not hit with negative headlines regarding plane malfunction or passenger issues — think Southwest Airlines Co.’s (NYSE:LUV) engine and window issues, or United Continental Holdings, Inc.’s (NYSE:UAL) issue with dogs dying in transit.
Delta has largely flown above such issues in the past year. What’s more, the company is poised to directly benefit from the recent U.S. Pact on Persian Gulf Airlines. Delta announced it is resuming direct flights to Mumbai, India last week.
Click to Enlarge But the biggest driver for Delta over many other airline stocks is its pricing power. Last week, Ryanair Holdings plc (NASDAQ:RYAAY) CEO Michael O’Leary warned that rising fuel costs could bring “a significant shakeout” in the airline industry. That shakeout is expected to heavily impact low-cost carriers. O’Leary specifically called out Norwegian Air Shuttle, which offers a $144.90 one-way flight from Oakland, California to London.
Delta stock responded to the shift bullishly last week, allowing the shares to breakout of a descending triangle formation.
The spark for the big move on Friday was a drop in fuel prices, as U.S. oil supplies rose more than expected on the week. DAL stock is now trading above former resistance at $55, and could be headed broadly higher as the summer rolls on.
Sentiment on Delta stock remains considerably bullish. Currently, Thomson/First Call reports that all 18 analysts following the shares rate them a “buy” or better. The 12-month price target rests at $72.94, leaving plenty of room for DAL stock to rally before valuation becomes a concern.
As for DAL stock options activity, the outlook is bullish there as well. Currently, the July put/call open interest ratio arrives at 0.58, with calls on the verge of doubling puts among back-month options. Peak call OI rests at the out-of-the-money $57.50 strike, reinforcing the bullish expectations of DAL stock’s options crowd.
Overall, July implies are pricing in a potential move of about 6.3% for DAL stock ahead of expiration. This places the upper bound near $59.40, while the lower bound lies at $52.30.
2 Trades for DAL Stock
Call Spread: DAL stock has a lot going for it right now. The shares are breaking out of a months-long decline, and have plenty of upside before valuation concerns set in. Traders looking to take advantage of a continued rally might want to consider entering an July $57.50/$60 bull call spread.
At last check, this spread was offered at 76 cents, or $76 per pair of contracts. Breakeven lies at $58.26, while a maximum profit of $1.74, or $174 per pair of contracts — a potential 128% return — is possible if DAL stock closes at or above $60 when July options expire.
Put Sell: If betting bullish on DAL stock has you a bit worried, you might consider entering a July $50 strike put sell position to profit from technical support. At last check, this option was bid at 47 cents, or $47 per contract. A sold put allows you keep the premium as long as DAL stock closes above $50 at expiration. On the downside, if DAL falls below $50 prior to expiration, you could be assigned 100 shares of DAL stock at $50 each.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
