Go Long United Continental Holdings on This Breakout

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UAL stock - Go Long United Continental Holdings on This Breakout

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In early February we had a stock market correction that was based on fears of runaway interest rates. Since then, we’ve had a slew of mini corrections on global tariff headline fears. So the equity prices whipsawed, but so far investors bought the dips. We’ve even set new highs on many indices.

For the last few months United Continental Holdings (NYSE:UAL) stock has been relatively stable, trading inside a sideways range. But therein lies the opportunity.

Last night, UAL management reported earnings, and they beat on all expectations. But more importantly, they raised forward guidance, which is what Wall Street likes these days.

So UAL stock is rallying this morning and it’s attempting to break out of the range. If it does so, this should have follow-through. It could even set new all-time highs.

But although I am cautiously optimistic on equity prices for this year, I do have a few reasons to worry. So today I am not chasing upside hopium. I have more confidence in the proven support for the next few months. So I continue to use options, at least until we get out of the headline-trading mode where a tweet could temporarily ruin the best strategies.

Today I share a UAL trade using options, where I can build a buffer from current price so I don’t need perfect entry points. This way if the breakout fizzles I can still realize maximum gains.

United Airlines stock is cheap as it sells for a 10 price-to-earnings ratio, so I’m very comfortable owning the shares especially if it’s at a discount from current price. The worst case scenario in my trade is that I own the shares 15% lower from here. I am confident in that case that I will be able to manage out of the position for profit overtime.


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Technically, UAL attempted this breakout back in January but eventually failed. This time it tries to do it with higher  lows and with a better base, so the odds of success are better than the last attempt in January.

UAL management delivered a stellar report and raised its guidance. So I can bank on them to continue their winning ways.

UAL Stock Trade Idea

It will need the help of the equity markets in general. The CBOE Volatility Index, or VIX, is very low in spite of all the uncertainties that still loom. This is often a sign of recklessness on Wall Street, so caution is necessary and warranted at this time.

The Trade: Sell the UAL Jan 2019 $60 naked put for $1.20. This is a bullish trade where I have a 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $58.80.

Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.

The Alternate Trade: Sell the UAL Jan 2019 $60/$57.50 credit put spread which would deliver over 16% in yield but with much smaller risk. Both setups have about the same odds of success and neither require a rally to win.

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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.


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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/07/go-long-united-continental-holdings-on-this-breakout/.

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