Since February of this year, the stock market has been in turmoil. Airline stocks were especially hit hard and they are mostly down for the year. United Continental Holdings Inc (NYSE:UAL) stock has held up better than all other major airlines but today the beatings continue.
This morning traders are reacting negatively to a Deutsche Bank downgrade of UAL from BUY to HOLD. So I’m looking to go long the stock on this dip.
Investors have been on edge since March mostly due to headlines threatening global trade wars. So stocks have suffered whipsaw effects. Nevertheless, we’ve seen new all-time highs in the small-cap and tech sector while other areas still suffer. So there is risk appetite but it’s being held hostage by headline threats.
Airlines of late have had the added downside pressure from a large spike in oil prices. But therein lies the opportunity.
I believe that the airlines will eventually pass the added cost through to consumers by raising prices. And I believe that the masses will end up paying the extra buck without many cancellations.
Valuations are attractive in the sector. UAL stock sells at a 10 price-to-earnings ratio which is cheap and absolute terms and in line to the sector. So owning the shares especially if at a deep discount from now is not likely to be a massive financial debacle.
In the long term, I am confident that I can manage out at the position for a profit. This is critical to the way I trade. I am not buying the shares of United Airlines today hoping it will rally so I can profit. Instead, I bet that investor fears are not likely to come true.
So I sell downside risk against proven support levels that I believe will hold through 2018.
Two UAL Trade Ideas
Technically, United Airlines stock range is getting tighter, so a move is likely to come. The direction of the move however is undetermined. But since we are at a levels that have been pivotal since 2015 so then it’s likely to lend support so the bulls may have an edge.
If the rally comes my profits will come faster. However I do not need the rally to collect. I can still retain my maximum gains even if the stock falls 20%.
The Trade: Sell UAL Dec $55 naked put for $1.03 This is a bullish trade where I have a 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $53.97.
Selling naked puts is daunting especially in a week with tariff deadlines and a jobs report. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the UAL Dec $57.5/$55 bull put spread which has about the same odds of winning and would yield 20% on risk. Compare this with risking $70 per share here and without any room for error expect a rally profit.
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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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